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

Shares of Staples, Inc. 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.

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