Staples has to find a buyer for Office Depot Europe – and fast.
While observers in the US have pretty much unanimously seen the European Commission’s “approval” of Staples’ acquisition of Office Depot as a positive development, it has left Staples with a race against the clock to find a buyer for Depot’s assets in Europe.
I put the word “approval” in inverted commas, because really it’s nothing of the sort.
The EU Commission will only sanction the deal on the basis of a sell-off of Office Depot’s entire contract business in Europe and its operations in Sweden. Those are pretty major conditions which essentially prevent Staples and Depot from combining in Europe.
If the deal had just been about Staples trying to buy Office Depot in Europe, then the EU Commission’s ‘approval’ would have effectively blocked the whole thing.
Interestingly, Staples has said it will go above and beyond the Commission’s divestment conditions by throwing the rest of Office Depot’s European operations – Viking, other online sites and retail stores – into the hat.
Why is it doing that?
Office Depot’s international assets were always secondary in the grand scheme of the acquisition. The key was to get the transaction approved in the US. Now, Staples can’t even consider closing the transaction – even if it were to successfully challenge the FTC in the US – if it can’t find a divestment solution in Europe.
As the EU Commission’s report confirms: “Staples can only implement the acquisition of Office Depot once the Commission has assessed and approved the divestiture to a suitable purchaser.”
Putting the whole of Office Depot Europe on the market no doubt stands a better chance of attracting a buyer than the contract and Sweden assets alone. Not only is it a question of scale, but how could the contract assets be extracted from the rest of the business in a practical and acceptable way? We’ve already seen the problems associated with this type of divestment in the US.
It might have been a possibility had Lyreco been in the frame, but the EU Commission’s decision rules Lyreco out. By concluding that there are three pan-European contract players – Staples, Depot and Lyreco – and by blocking a Staples/Depot tie-up, the EU is rejecting a three into two market scenario. That puts Lyreco out of the picture for picking up Depot’s European contract business.
Hence the decision by Staples to add in Depot’s other European assets too.
Not that this means buyers will necessarily be queuing up.
A look at the European market doesn’t throw up any obvious candidates. There are multinational resellers such as Manutan, Takkt and Raja in adjacent categories. Grainger got its fingers burned in Europe a few years ago when it bought Fabory, but looks to have made a better choice with Cromwell in the UK. However, none of these companies have shown any particular interest in acquiring in the office supplies space.
A more likely solution for Staples is through the private equity channel. The addition of Viking into the mix offers a nice, juicy carrot even if its transition from a catalogue to a web business has been a bit of a painful one.
The EU Commission told OPI that the timeframe for these types of divestitures is set on a case-by-case basis, but said that “it is in the interest of the parties to divest their assets as soon as possible so that the deal can be finalised”.
Certainly, Staples will be looking at finalising all this in line with the expected ending of the federal court hearing in the US – mostly likely early-to-mid May. That is probably why this news broke this week, about a month ahead of the deadline set by the EU Commission.
Private equity would, as always, be interested in picking up a bargain. With Staples required to come up with a suitable purchaser that would pass EU Commission muster in a short space of time, it certainly looks like a buyer’s market in this case.
Office Depot’s European business has estimated annual sales of around €2-billion ($2.2 billion) – but with the top line declining in the mid-single digits – and is just about breaking even. Given the need for a quick solution, the selling price could be very low indeed.
This whole thing is dependent on the Staples acquisition of Office Depot being approved in the US and then in Canada. The chances of that happening are hanging in the balance, so there is no guarantee that Staples will ever have to sell off the Depot Europe assets at all.
However, even if the Staples/Depot merger doesn’t happen, what is going on in Europe at the moment might give us a few pointers as to what Depot does with its overseas assets should it be forced to continue as a standalone company.
By Andy Braithwaite for OPI.net