June 29, 2017

Private equity firm buys Staples for $6.9 billion

Sycamore Partners to acquire struggling office supply chain as customers abandon brick and mortar stores for Amazon.

By Ben Ames

Office supply products vendor Staples Inc. will be acquired by investment firm Sycamore Partners for $6.9 billion, as Staples management decides to take the company private in an era when shoppers are abandoning brick and mortar stores in favor of online retailers like Amazon.com Inc.

New York-based Sycamore Partners will add Staples to its stable of brick and mortar retailers such as the home décor seller NBG Home, defunct clothing retailer The Limited, department store chain Belk Inc., and variety store chain Family Dollar. The Staples transaction is subject to regulatory and stockholder approval, and is expected to close no later than December, 2017, Sycamore said.

Staples' board has unanimously approved the offer, saying it is the best way to enhance share value for stockholders, following an extensive search of various alternatives, Staples Chairman Robert Sulentic said in a statement.

Framingham, Ma.-based Staples has been looking for ways to plug leaks in its foundering financial results. In 2016, the company tried to merge with its rival Office Depot, but a federal judge put the kibosh on that plan, agreeing with the Federal Trade Commission (FTC)'s complaint that the combination of office supply stores would violate antitrust rules.

The store has seen its annual revenues fall in recent years, reporting that annual company sales fell three percent in 2016 to $18.2 billion. The company shuttered 48 stores last year in North America, but still ended 2016 with 1,255 stores in the U.S. and 304 stores in Canada. Staples sold off its U.K. retail business last year and its European operations in February 2017.

Staples' large store footprint is a microcosm of the larger problem plaguing U.S. retailers, namely too much physical space to support end demand. The U.S. has 24 square feet of retail space per capita, five to six times higher than Britain and France. Unsold or slow-moving store inventory is proving a drag on U.S. GDP growth, although retailers are slowly eating into that inventory by closing stores.

Sycamore did not indicate how it planned to find new profits in Staples' business model in a world where Amazon continues to expand its share of retail sales by flexing its massive scale and efficient e-fulfillment techniques. However, the firm said it had confidence in Staples CEO Shira Goodman and her management team and planned to partner with them to accelerate profitability.

In a statement, Goodman said the deal would give the struggling chain additional resources to continue to operate. "The Sycamore Partners team shares Staples' entrepreneurial spirit and long-term vision," Goodman said. "This transaction will enable us to drive greater value for our customers and immense opportunity for our business."

But finding ways to make Staples profitable again could be a problem, because any given sector just has room for a few large retailers, and two of them usually happen to be Amazon and rival Wal-Mart Stores Inc., said Philip Evers, logistics professor at the University of Maryland's Robert H. Smith School of Business.

"If you look at a particular category, whether it's office supplies, fashion, or electronics, there are typically two—or maybe three—strong big-box retailers nationwide, and recently the online retailers have been taking over one of those top positions."

For example, as Amazon has built a large share in the electronics marketplace, Best Buy is the only remaining major competitor, leaving other firms to fade away or retrench.

Despite the challenges of running a brick-and-mortar company in the online age, Staples does have several advantages, Evers said. It has a large presence serving businesses and government institutions, he said. That is a valuable stream of revenue, since those contracts are executed almost exclusively over the company's website as opposed to its stores, allowing Staples to fulfill those orders through its efficiently run DCs.

Staples' roster of storefront properties may also be a valuable asset, since it gives the company a base for fulfilling online orders through in-store pickup as part of an omnichannel strategy, Evers said. "Brick and mortar's not dead. Amazon itself is moving into that sector in many ways, whether it's buying Whole Foods or building their own stores," said Evers.

About the Author

Ben Ames
Senior Editor
Ben Ames has spent 20 years as a journalist since starting out as a daily newspaper reporter in Pennsylvania in 1995. From 1999 forward, he has focused on business and technology reporting for a number of trade journals, beginning when he joined Design News and Modern Materials Handling magazines. Ames is author of the trail guide "Hiking Massachusetts" and is a graduate of the Columbia School of Journalism.

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