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Why Staples Stock Is Up 11% So Far This Year

By Timothy Green - Updated Jul 19, 2017 at 2:36PM

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The company is taking its turnaround out of the public eye.

What happened

Shares of office supply retailer Staples (SPLS) have surged 11.6% year to date, according to data provided by S&P Global Market Intelligence. The big news driving the gain came on June 28, when Staples agreed to be acquired for $10.25 per share. Staples' 28-year run as a public company will come to an end when that deal closes later this year.

So what

Staples is being acquired by Sycamore Partners, a private equity firm, for $6.9 billion in cash. This deal comes a little more than a year after Staples' attempted acquisition of rival Office Depot was blocked, forcing the company to abandon the effort. Staples is now being bought out for barely more than the $6.3 billion it had planned to pay for Office Depot.

The inside of a Staples store.

Image source: Staples.

While the retail side of Staples is struggling, the commercial side is a different story. In 2016, comparable sales tumbled 7% at Staples' North American retail stores. Meanwhile, the North American commercial delivery business enjoyed a 1% increase in comparable sales, along with a slight bump in operating margin.

Sycamore Partners is likely most interested in the commercial side of Staples, which has held up far better than the retail side. Staples has been closing stores, with the latest plan to close 70 locations announced in March. More store closings are likely as the company accelerates its shift toward serving businesses through its delivery business under private ownership.

The deal is expected to close before the end of the year. Financing for the deal is already in place.

Now what

With Staples stock trading just below the acquisition price, there's no real reason to buy shares. A higher bid is unlikely, given that Staples has already considered other options and reportedly rejected bids from other suitors. While Sycamore may appear to be getting a great deal, paying less than 14 times Staples' expected free cash flow this year, that free cash flow is less than one-third of what the company produced in fiscal 2010.

A turnaround as a private company will still be difficult, with the retail business weighing the company down. But out of the spotlight, the shift in focus probably has better odds of success.

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