Staples Seals A Deal, But Risk Weighs On Offer Price

Staples, Inc. SPLS's agreement to sell itself to Sycamore Partners for $10.25 per share or $6.9 billion "makes total sense," at least according to UBS analyst Michael Lasser.

While the case could be made that Staples sold itself at a poor valuation, this may not be the case, Lasser argued in a report. Specifically, the acquisition assumes a multiple of 12x on consensus fiscal 2018 earnings per share and 5.6x consensus 2018 EBITDA -- a "pretty modest" price tag when considering the retailer "faces a host of risks" with no clear exit strategy.

"There's a lot of work to be done to turn-around this business, and the competitive landscape probably won't get much easier," Lasser wrote. "Thus, the multiple reflects these factors."

Nevertheless, Staples' deal signals that there will likely always be a price at which a strategic buyer finds compelling enough in face of an uncertain future. In Sycamore's case, the private equity firm likely need to assume a "meaningful" amount of debt to fund the transaction, which could restrain its financial flexibility moving forward.

On the other hand, Staples' free cash flow of $680 million is "significant" and can support a more levered capital structure.

Investors expecting Staples' deal to spur further M&A activity in the retail space may need to reconsider as the valuation of many other companies "have to come down quite a bit" to meet the multiple at which Staples is being acquired.

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