Unlocking Value? Starboard Invests In Staples And Office Depot (Part 18 of 19)
SPLS capital structure
Staples (SPLS) had cash and equivalents of ~$770 million as of November 1, 2014. This implies that SPLS might need to find other sources of funding to finance a potential $4–$5 billion Office Depot (ODP) acquisition.
Currently, SPLS’s long-term debt-to-equity ratio is low at ~17%—as of November 1, 2014. Considering the current vulnerability of its business model, it probably isn’t a good idea for SPLS to undertake debt to finance a potential ODP acquisition. Although interest rate spreads are relatively low right now, financing debt might put pressure on the SLPS’s already slender profit margins.
Credit ratings
It may also lead to a downgrade in credit ratings. Currently, Standard & Poor’s (MHFI) has a rating of BBB- on SPLS’s debt. This is about one notch above junk. Moody’s (MCO) rates its debt at Baa2, or two notches above junk. It’s below investment-grade.
An expensive acquisition could see a debt downgrade for SPLS, especially when ODP’s debt is already rated below investment-grade. MHFI and MCO rate ODP’s debt at B- and B2, respectively. A lot depends on how the new company executes its costs strategy and retains its customer base. High incremental cash flows would improve its debt worthiness and vice versa.
Deal structure
Therefore, a possible acquisition by SPLS will likely be an all-stock deal. This was the case in the ODP-OfficeMax (OMX) merger of equals. In this case, a potential deal is more likely to see SPLS buyout ODP.
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