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NEW YORK (Reuters Breakingviews) - It's going to take a lot of tape and scissors to piece together a leveraged buyout of Staples that works. The office-supplies chain is in talks with private-equity shops about a possible deal. According to Breakingviews calculations, however, the investment proposition looks shaky.
Since a plan to merge with Office Depot was shot down by U.S. regulators last year, Staples has replaced its chief executive and renewed efforts to slash costs. Sales at its 1,500-plus stores in the United States and Canada fell 7 percent last year and now account for less than 40 percent of some $18 billion in revenue. The rest comes from online and business customers.
The company's clean balance sheet and about $900 million a year of operating cash flow make it a buyout candidate, on paper. A 30 percent premium to its undisturbed market value, before news reports about a possible sale, would make the price tag about $7.4 billion.
Buyouts often rely on growing EBITDA, but in this case merely stopping the decline would be an achievement. Most LBOs these days involve an equity check for about 40 percent of the value. Though it would amplify the risk, at just 30 percent Staples' debt would come in under four times its $1.3 billion of expected EBITDA. That's practicable.
Then assume the buyer could sell Staples again in five years at the same multiple of EBITDA as it pays, just shy of six times. The company's dividends run around $300 million a year. Suppose generously that the new owner could squeeze out the same amount even after paying interest on $5 billion of debt.
Tally it all up, and the internal rate of return would reach 14 percent. It's decent, but falls short of the usual buyout target and would require exemplary execution in a tough business at a company that's currently shrinking.
Combining with Office Depot would transform the calculus. Staples once envisioned $1 billion a year of annual synergies, which would boost returns dramatically. There's a notion among dealmakers that the Trump administration will ease up on competition reviews. The new president also wants to preserve American jobs, though. That makes a merger far-fetched – and may leave any Staples buyout plan strictly on the back of an envelope.