A Most Interesting Acquisition Bid
The parent company of office supplies retailer and business IT services provider Staples Monday unveiled a plan to acquire rival Office Depot in a $2.1 billion deal that proposes the eventual divestiture of Office Depot’s business-to-business-focused businesses.
Staples, known officially by its corporate name of USR Parent, Monday proposed to Office Depot’s board of directors that it acquire Office Depot for $40 per share in cash, or a total of about $2.1 billion. That, Staples said, represents a 61 percent premium over Office Depot’s average closing share price over the last 90 trading days.
Staples’ bid to acquire Office Depot is interesting for several reasons. It’s not the first time the two have reached out to each other. And given the difficulties retail businesses are facing during the pandemic, it is interesting to see the focus of this bid on the retail side of the office supplies business, with Staples actually encouraging Office Depot to consider exiting its systems integration and business services businesses.
This will be an acquisition that will be discussed and haggled over for some time to come. Here are five things to know about the bid and possible outcome.
Make Up To Break Up?
Staples, in its current proposal to acquire Office Depot, does not appear to be interested in the business-to-business aspect of its rival.
In its Monday letter to Office Depot, Staples proposed that Office Depot divest itself of one or both of its business-to-business units as a way to increase its value.
“We may increase our proposed valuation (i) for logical strategic divestitures that ODP may execute to unlock value, such as the sale of its CompuCom business and/or (ii) if ODP conducts a comprehensive sale process for its U.S. commercial business unit (the ‘B2B Business),” Staples wrote.
CompuCom is a large national systems integrator that Office Depot in 2017 acquired for about $1 billion. Office Depot in November reported that its CompuCom Division reported sales of $197 million in the third fiscal quarter of 2020, which was down 22 percent year over year because of the impact of the COVID-19 coronavirus pandemic on product sales and services.
Office Depot’s business-to-business division, called the Business Solutions Division, reported third fiscal quarter sales of $1.2 billion, down 11 percent because of the pandemic. However, that impact was partially offset by a 20 percent increase in sales via its e-commerce channel.
Should those two divisions be divested, Office Depot would primarily consist of its retail office supplies business, an area where the company has been closing retail stores.
Meanwhile, Staples itself started focusing more on the B2B business after its 2015 merger with Office Depot was canceled. By 2017, the company had divided into a retail business, a B2B business and Staples Canada.
The end result? If Staples does indeed acquire Office Depot, expect CompuCom and/or the B2B divisions to be acquired or become stand-alone companies.
Who Owns Staples And Office Depot?
While “Staples” is the name by which the company is universally known, it is more formally known as USR Parent, which is owned by New York-based equity firm Sycamore Partners.
USR Parent was originally set up as Arch Parent by Sycamore Partners in mid-2017 solely for the purpose of acquiring Staples, which at the time was a public company. The acquisition of Staples valued the company at $6.9 billion.
Office Depot, on the other hand, is a publicly listed company.
Third Time’s The Charm?
This is not first attempt to combine Staples and Office Depot. Or its second attempt, for that matter. It’s the third time.
Much has been written about Staples’ previous bid for Office Depot. Staples in early 2015 unveiled a plan to acquire Office Depot for about $6.3 billion in cash and stock, but by mid-2016 called off the acquisition after it was blocked by a federal judge, with the U.S. Federal Trade Commission objecting to the potentially large reduction in competition in the consumable office supplies market.
However, prior to that attempt, Staples in 1996 attempted to merge with Office Depot, but the FTC pushed back against the merger because of fears of unfair increases in prices for office supplies, after which the two companies’ rivalry intensified.
The Big Unknown: Can Staples Succeed?
Staples’ 2015 bid for Office Depot was shut down by the FTC because of potential anti-competitive issues related to bringing the two biggest names in retail consumable office supplies sold to businesses under the same roof.
“[The FTC’s] complaint alleges that, in competing for contracts, both Staples and Office Depot can provide the low prices, nationwide distribution and combination of services and features that many large business customers require. The complaint further alleges that, by eliminating the competition between Staples and Office Depot, the transaction would lead to higher prices and reduced quality, and that entry or expansion into the market—by other office supplies vendors, manufacturers, wholesalers, or online retailers—would not be timely, likely, or sufficient to counteract the anticompetitive effects of the merger,” the FTC wrote on May 19, 2016.
Several things have changed since then.
For instance, Office Depot has said it plans to close 90 of its stores in 2021, following up on the 55 locations that were closed in 2020, according to the online news site Moneywise. Office Depot may also be closing some of its OfficeMax stores. Staples itself has closed dozens of domestic and international retail locations as well.
The government’s decision over whether or not to allow Staples to acquire Office Depot will come after a new administration take over. As of press time, President-elect Joe Biden is still in the process of determining his new Cabinet and business policies have yet to be made clear. However, it is important to note that many of those expected to take the reins in the new administration had government experience during the Barack Obama administration, which was in power during the last time Staples attempted such an acquisition.
Furthermore, both companies, known primarily as retailers of office supplies, have heavily invested in IT solutions and business-to-business office supplies and services, making them much more well-rounded companies than in the past.
Finally, both Staples and Office Depot are different companies since the last time they tried getting together. During the last attempt, Staples was a public company, but is now owned by a private equity firm. And Office Depot has expanded with the acquisition of CompuCom and the new focus on its Business Solution Business.
Office Depot Isn’t Saying Yes, But It Isn’t Saying No, Either
Office Depot, in a statement, acknowledged the receipt of the proposal to acquire the company from USR Parent, the parent company of Staples.
“Consistent with its fiduciary duties, ODP’s Board of Directors is carefully reviewing the proposal in consultation with its financial and legal advisors to determine the course of action that it believes is in the best interests of the Company and its shareholders. As part of its review, the Board is evaluating various components of the proposal, including potential antitrust and other regulatory challenges given USR Parent’s ownership of Staples and past regulatory decisions blocking the combination of the two companies, purchase price, and closing conditionality,” Office Depot said in that statement.
Office Depot also noted that, as USR Parent said in the letter, the regulatory process involved in the acquisition could take at least six months.
