Staples makes shock move for Essendant

The proposed merger of Essendant and SP Richards has been thrown into doubt after Staples has entered the race to acquire Essendant.

In a regulatory filing with the US Securities and Exchange Commission (SEC), it has been revealed that Staples has taken a 9.9% stake in Essendant and has made an offer to acquire the wholesaler.

According to the SEC filing:

  • On 17 April Staples sent a letter to the Essendant CEO and its board of directors to express its interest in engaging with the wholesaler regarding a proposal to buy the company for $11.50 per share in cash. Staples said its offer delivered a significant premium to Essendant shareholders over the proposed SP Richards agreement and would also face fewer antitrust problems.
  • On 27 April, Essendant replied to the Staples letter, saying it was not able to enter into discussions with Staples under the terms of its merger agreement with SP Richards owner Genuine Parts (GPC), and that Staples’ offer was not likely to result in a superior proposal to its agreement with GPC.
  • On 29 April, Staples sent another letter to Essendant reiterating its commitment to acquiring the wholesaler and saying it should be able to increase its offer “significantly in excess” of $11.50 per share.
  • On 10 May, Essendant sent a draft of an ‘Acceptable Confidentiality Agreement’ to Staples, the terms of which are currently being reviewed by Staples and its representatives.
  • In the event that Staples and Essendant enter into a mutually acceptable confidentiality agreement, Staples will seek to engage with Essendant representatives to discuss its proposals.
  • As of 16 May, Staples – via an entity called Emu Investments – owned around 37 million, or 9.9%, of Essendant’s common stock. It acquired these shares between 1-16 May, investing just over $34 million to do so.

It would appear that as part of their fiduciary duties, Essendant’s board of directors have had little choice but to initiate a process of engagement with Staples: the Staples offer is all cash – giving Essendant shareholders immediate liquidity – and the promise of more than $11.50 per share represents a premium over the GPC/SP Richards deal.

However, that is not all.

In a press release, Essendant confirmed that it had also received an improved offer from GPC on 7 May that could value the GPC deal at $12 per Essendant share. This proposal involves a contingent cash payment of up to $4 per share payable to Essendant shareholders once its merger with SP Richards has been completed.

GPC also issued a press release in which it stated:

“We do not believe Staples’ conditional, non-binding proposal to acquire Essendant for $11.50 per share in cash to be a superior proposal nor reasonably likely to lead to a superior proposal as defined under the terms of the Merger Agreement. Indeed, given the proposed enhanced terms and the expected financial benefits of more than $75 million in annual run-rate cost synergies and more than $100 million in working capital improvements, we are confident that the merger between SP Richards and Essendant delivers superior value to Essendant’s shareholders.

“Based on our preliminary analysis, we estimate an implied trading multiple for the combined company of approximately 8.0x EBITDA, in which case these expected synergies would result in an additional $700 million in shareholder value, or approximately $8.75 per share.

“Further, as a stronger, more competitive business products distributor with greater scale and service capabilities, the combined company will have an enhanced ability to support customers, including:

  • Greater resources to support and partner with the independent dealer channel and resellers in other sales channels, and to make investments to drive enhanced value for customers, consumers and shareholders;
  • Optimised product assortment of branded and private-label products across a broad set of categories;
  • Enhanced capability to develop and offer innovative solutions to customers, including value-added marketing and analytics to drive demand; and
  • Consolidated distribution network with greater efficiencies throughout the entire supply chain.

“Through increased scale, improved service capabilities and an enhanced financial profile, the combination of SP Richards and Essendant will drive more profitable growth and create meaningful value for shareholders over the long term.”

What happens next is not clear. That will depend on any further offers and counter-offers, but ultimately the Essendant board of directors will have to recommend a course of action that it believes is in the best interests of its shareholders. As it stands, the Essendant board is still recommending the transaction with GPC, and the move by Staples is clearly seen as a hostile one by both Essendant and GPC.

If independent dealers were asking questions about an Essendant/SP Richards tie-up, what must they be saying about the prospect of the channel’s largest wholesaler being swallowed up by Staples and its private-equity owner Sycamore Partners?

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