As per the terms of the merger agreement, Staples is now obliged to pay Office Depot a $250 million break-up fee.
Ron Sargent, CEO and Chairman of Staples, Inc. said,
“We are extremely disappointed that the FTC’s request for preliminary injunction was granted despite the fact that it failed to define the relevant market correctly, and fell woefully short of proving its case.”
“We believe that it is in the best interest of our shareholders, customers, and associates to forego appealing this decision, terminate the merger agreement, and move on with our strategic plan to drive shareholder value. We are positioning Staples for the future by reshaping our business, while increasing our focus on mid-market customers in North America and categories beyond office supplies.”
Shares of Staples crashed 18 percent to $8.46 a piece and Office Depot tumbled over 40 percent to $3.63 following the news.
This analysis will focus on Staples only. It will not touch upon whether Staples is a long or a short at current level but it will discuss safer investing levels.
First of all, let us put forth the balance sheet items.
At the end of January 30, 2016, the company reported $5,112 million in current assets which were sufficient enough to meet the current total liabilities of $4788 (=$3,264+1,018+506). Even if the current assets were used to meet all these obligations, the company would still be left with $324 million.
Now, the company has to pay $250 million as a break-up expense to Office Depot, so hypothetically, there will still be $74 million in liquid assets.
The balance sheet statement reveals that the Net Property and Equipment stood at $1,586 million at Jan end. Assuming a 10 percent depreciation (annually, of course) in this value, the Net Property and Equipment comes out to be $1,427 million for the fiscal ending Jan 2017.
So, the total tangible assets and liquid assets are $74 + $1427 = $1501 million.
The Intangible Assets, Net of Accumulated Depreciation were $274 million while Other Assets were at $547 million. This total is $821 million. From a safe point of view, I would recommend a 20 percent amortization rate which would put it at $657 million for the period ending Jan 2017.
I don’t think that there is any good way of valuing Goodwill. It is mostly based on expectations, which can fluctuate wildly from time to time. And therefore, I have not included the $2,653 million value of Goodwill in this analysis. This also helps me reach an extremely safe investing level while putting me at the risk of missing out on huge upsides.
Assuming there are no major deviations from the depreciation and amortization assumptions made above, the company will be worth roughly $2,158 million at the end of Jan 2017, excluding the Goodwill amount.
Staples, as of yesterday, had a market cap of $5.47 billion, more than twice the figure ($2,158 million) we achieved above.
What do we do now?
Simple. Sit on the sidelines for now. Let the stock drop even more, and start building long positions if the shares drop sharply. I would recommend $6 per share as a good entry point.
I am not suggesting that the market will value the company at $2.16 billion (barring goodwill) by the end of this fiscal. However, I am definitely saying that this is a strong floor which the market will respect, and levels closer to this target should be used to build long positions. When you do invest, be ready to give at least 3 years to reap great returns.