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Leveraged Buyout Of Staples Merits Consideration, But Not A 'Slam Dunk'

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Leveraged Buyout Of Staples Merits Consideration, But Not A 'Slam Dunk'

Shares of Staples, Inc. (NASDAQ: SPLS) soared Tuesday following reports the office supply retailer is in talks to sell itself in a deal that would value the company at $7 billion or more.

Anthony Chukumba of Loop Capital Markets commented on the reports, noting that the concept of a sale of itself "would merit the consideration" of financial sponsors but in no means is a deal a "slam dunk."

Chukumba explained that while Staples' physical business is a source of concern, the "much more stable and defensible" North American Delivery segment is an attractive asset for a strategic buyer. Moreover, Staples could also be seen as an under leveraged business that generates a healthy free cash flow.

$11 Per Share Price Tag

If a deal were to occur, the analyst believes an offer of $11 per share would generate an internal rate of return (IRR) of 16 percent. This would mark a "decent" return for a buyer but still short of a 20 percent return that private equity firms typically strive for.

With that said, Chukumba noted there is little upside in Staples' stock from its current levels. Aside from M&A talk, Staples' stock is trading at 10.7x the analyst's 2017 diluted earnings per share estimate, which is a discount to its one-year forward multiple over the past five years.

However, Staples' stock is also trading at a valuation in-line with other "secularly challenged" specialty hardline retailers. As such, the analyst is advising investors to "wait for a more attractive entry point before becoming more constructive on the stock."

Shares of Staples remain Hold rated with an unchanged $10 price target.

See Also:

Compare And Contrast: Staples Vs. Office Depot

Best Buy Would Be Major Beneficiary Of An hhgregg Liquidation

Latest Ratings for SPLS

DateFirmActionFromTo
Apr 2017UpgradesNeutralBuy
Dec 2016Initiates Coverage OnHold
Aug 2016MaintainsHold

View More Analyst Ratings for SPLS
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Posted-In: Anthony Chukumba retailers StaplesAnalyst Color M&A Rumors Analyst Ratings Best of Benzinga

 

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