Some analysts commented that the market was disappointed with some aspects of the merger deal
Staples announced its agreement to acquire all of the outstanding shares of Office Depot for $6.3 billion yesterday.
Staples Chairman and CEO Ron Sargent said the acquisition is transformational that would allow the company to provide more value to customers and effectively compete against its rivals in rapidly evolving competitive environment.
On the other hand, Office Depot CEO Roland Smith said the merger would deliver great value for shareholders. It would also create a company that would be ideally positioned for long-term growth.
Staples’ decision came after Starboard Value intensified its demand for the company to combine its business with Office Depot. Last month, the company pointed out that a “merger makes too much sense to ignore.”
Staples-Office Depot transaction details
Under the agreement, the shareholders of Office Depot will receive $7.25 in cash for every ODP stock and 0.2188 of a share in SPLS stock at the closing. The acquisition price for Office Depot is $11 per share, a premium of 44% base on the closing price of the stock on February 2, 2015.
Staples said the merger will deliver at least $1 billion of annualized cost synergies by the third full fiscal after the closing of the transaction.
“We expect to recognize at least $1 billion of synergies as we aggressively reduce global expenses and optimize our retail footprint,” said Sargent.
After the completion of the acquisition, Staples will increase the number of its board members to 13 including two directors from Office Depot. Sargent will continue to serve as chairman and CEO of Staples.
The company temporarily suspended its stock buyback program, but remained committed to its current quarterly dividend of $0.12 per share.
Staples obtained financing commitments from Barclays and Bank of America Merrill Lynch for a $3 billion ABL credit facility and $2.75 billion 6-year term loan.
Analysts’ reactions on the proposed merger
Jefferies analyst Daniel Binder and his team commented that the market was disappointed with some of the aspects of Staples proposal to acquire Office Depot. According to the analysts, some were disappointed with the estimated synergies of at least $1 billion, but they were not surprise.
Binder and his team also noted the divestiture caps for Staples to walk away seemed low and they think that regulatory concerns regarding large contract business maybe weighing on the shares of both companies.
On the other hand, Barclays analyst Alan Rifkin and his colleagues temporarily suspended their ratings for Staples and Office Depot following the announcement of the merger because of the firm’s role in the transaction.
Meanwhile, analyst Michael Lasser and his team believed that the shares of Staples have a lot of potential and uncertainty. They updated their merger model to reflect the terms and structure of the deal.
According to them, “Using a majority of cash will allow for Staples to create value by deleveraging its balance sheet over time.” They believe that the company can also take advantage of very attractive financing rates.
The analysts estimated that the combined company would be able to generate $2.19 in earnings per share (upside case puts the EPS power closer to $3.50) by 2018 based on the assumed $1 billion in cost synergies.
“Yet, this balanced by the fact that we don’t know how much SPLS will look to reinvest the cost savings back into the business to better reposition it for the LT,” according to Lasser’s team.