When a once-sturdy business is spiraling down, call none other than a private-equity team to swoop in and save the day. Sometimes, "saving the day" means saddling a company with debt and draining it to death. Other times, it means a corporate restructuring and a brilliant rebound. And then, in the worst cases, it means picking the meat off the bones and flinging it to the highest-paying dogs. Office-superstore chain Staples (Nasdaq: SLPS) has been cut in half in recent years, and talks are emerging of a private-equity bailout. What will become of the iconic office supplier?
An all-too-familiar story
I feel as if I could write this article about six different companies and it would read largely the same. A retail operation, once profitable and with stores in every town, is in trouble.
For what it's worth, Staples isn't the worst of the retail dinosaurs. Sure, its valuation has been sliced and diced over the past few years, but the company brings in a billion in cash a year, has a tremendous online business, and has the typical department store-esque real estate play lying underneath.
Staples' EV/EBITDA is 4.59. To lend some context to that number, the ratio is 5.95 at Macy's and 2.34 at Best Buy (NYSE: BBY). Enterprise value, or EV, to EBITDA is a valuation metric I prefer for many retail companies because it better represents the cash-generating abilities of a company. According to these numbers, Staples falls on the lower end -- certainly not in Best Buy territory, nor should it be. Alas, the office store's stock price has gone from around $22 in 2011 to around $12 today.
When a company gets cut like that, it becomes particularly attractive to private-equity or activist investors. Staples' underlying fundamentals are still attractive to investors who are digging deep for value.
Tricky deal
Staples would be a likely takeover target in the near future if it weren't for the size of the company. At a market cap of $8.5 billion, it would represent a hefty check to hand over to shareholders if any one private-equity firm were to be interested. More likely is that multiple private-equity firms, such as Blackrock (NYSE: BLK), TPG, and Bain, could work together on a bid. Coincidentally, the proposal also comes at a time when Best Buy is looking for a similar solution.
Best Buy has had offers, led by its founder, to take the company off the public markets. In my opinion, the company is in worse shape than Staples and needs to find a solution in a quicker manner. This could make a takeover of Staples tricky, because there are only so many billions available in the buyout funds of major firms. In addition to limited capital, the funds' investors themselves may be uninterested in the double exposure to big-box retail and could potentially nix one, if not both, of the deals.
One thing's for sure
The news surrounding Staples is just another sign that big-box retail is undergoing a major renovation. In time, we will see many brands vanish -- even ones we've seen in our malls and on our street corners for decades. Some management teams will be proactive, such as the ones at J.C. Penney, and take measures to keep their stores relevant in today's culture. But for those who sit around and watch sales dwindle and their stores empty, the writing is on the wall.
As for Staples, I highly doubt the company will become one of those to erode into nothingness, as its Web presence is industry-leading and competes only with Web-based retailers such as Amazon.com and dedicated online office-supply stores. The company is in trouble, as evidenced by its cascading stock price, but it at least seems to have options available to it.
For a look at three retail companies our analysts find to be in top shape, check out this special free report. In it, you can read about Amazon and the other cash kings of retail.
