October 16, 2017
Focus on MetroWest

Can going private save Staples?

Flickr/Mike Mozart
Staples has closed about one-fifth of its stores since 2011 and will shutter 70 more this year.
Staples president and CEO Shira Goodman.

Staples has tried merging with its biggest rival, has added workspaces to several of its stores and is taking a turn toward business-to-business sales. Nothing has worked quite yet to help the Framingham office retailer dig out of its troubles.

Now, the company has gone private in a $6.9-billion sale in September, but will time away from the glare of shareholders and analysts poring through earnings reports help make the changes necessary to be on stable footing again?

"The argument on its face is very compelling," said Mark Hulbert, the founder of what became the analysis firm MarketWatch, where he is a senior columnist. "I can see why shareholders would [agree to the private sale]. It's, 'Let's take our money and run.'"

Whether private equity firms are more likely to turn a company around compared to if it had remained public isn't so easy to determine, Hulbert said.

Privatization's spotty record

A study of more than 300 leveraged buyouts between 1995 and 2007 found no evidence of operating improvements after a buyout, which was reported in the Journal of Financial Economics in 2014.

The report did not single out winners or losers among those taken private, but appears to be a rare detailed accounting of private sales by definition difficult to study because financials are not made public.

The findings fly in the face of the idea going private helps a company improve its operating performance, said the authors of the study, three business professors.

Staples leadership called the sale to Sycamore a good fit to benefit both customers and employees.

"The Sycamore Partners' team shares Staples' entrepreneurial spirit and long-term vision," said Staples CEO and President Shira Goodman in a statement when the sale agreement was announced in late June. "This transaction will enable us to drive greater value for our customers and immense opportunity for our business."

Staples sold for a premium of about 20 percent of share prices at the time, which were about $10, or half of its peak in 2010. The company did not give additional comment for this story.

Staples has a lot riding on a new future under Sycamore Partners, a New York City private equity firm managing more than $3.5 billion in capital. The six-year-old firm has taken what looks to be a contrarian bet on the future of retail, buying and selling a range of companies.

Sycamore bought Talbots for $369 million in 2012 after the struggling Hingham-based women's retailer cut headquarters jobs and ended a fight against Sycamore's takeover attempt.

Sycamore bought the 600-store mall regular Hot Topic in 2013 for about $600 million. The firm paid a 30-percent mark-up above shares at the time for a company that, unlike some others that it has bought, was doing well at the time of the sale. Sycamore sold luxury shoe line Stuart Weitzman to Coach in 2015 for $574 million, and also tried buying clothing lines Aeropostale, Express and Chico's.

Sycamore's faith in retailers

In 2015, Sycamore bought North Carolina apparel chain Belk for $3 billion. A year later, a retail expert told The Charlotte Observer the Belk family that ran the chain for more than a century was smart to sell when it did. Belk operates nearly 300 stores, slightly fewer than a decade ago, but its financial performance isn't known.

Sycamore was founded and is run by Stefan Kaluzny, a graduate of Phillips Academy in Andover. The firm has given little to no details publicly about its ways of operating such businesses, and declined to comment for this story.

"There's little doubt the odds are stacked against Kaluzny," media outlet Bloomberg said in a profile on the Sycamore leader in May.

Leveraged buyouts have been a part of the corporate world since the 1970s, became more popular in the '80s, and then fell out of favor, said Leon Rosenthal, a finance professor at Bentley University in Waltham. The idea of private equity is a new owner will run the company very efficiently, getting rid of unprofitable stores or product lines or staff, and returning the company to the public market again at a large profit, he said.

In Staples' case, Rosenthal said, life under private equity may likely mean sharper cuts than have already been put in place. He didn't predict whether Staples will do better as a private company than it did a public one.

"They're going to have to close a lot more stores," Rosenthal said. "They have too many stores. There's no question about that."

Staples' unknown future

If Staples' tenure under private equity is successful, it'll break a bad streak for the retailer.

In May 2016, Staples and rival Office Depot called off a proposed $6.3-billion merger amid regulatory pushback. That decision cost Staples $250 million in a fee it paid to Office Depot.

The New York Times in June speculated Sycamore may try to revive a merger with Office Depot under a Trump Administration more likely to approve such a deal.

Last December, Staples sold its European division to Cerberus Capital for a $117-million loss. Then, early this year, Staples said it would close 70 stores this year – on top of more than 300 it had already shuttered since 2011, cutting more than one-fifth of its total.

Cost-cutting has been a priority even before Sycamore entered the picture. Staples said in a presentation to shareholders early this year it planned $100 million in cuts each year from 2016 to 2018. The company cut roughly $300 million in 2015 alone.

Business-to-business sales are expected to to be a larger share of Staples' business, at least if prior plans continue under Sycamore. Staples said earlier this year product deliveries were planned to increase from roughly 60 percent of total sales in 2015 to more than 80 percent by 2020.

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