A Valuation of the Leveraged Buyout of Staples, Inc. by Anders Klug│73812 & Franziska Lea Kuder │107351 A thesis submitted in partial fulfilment for the degree of Master of Science in Economics and Business Administration, Finance and Investments Supervisor: Edward Vali Number of pages: 120 (148) Number of characters (incl. spaces): 291,579 (325,575) Submitted: September 17, 2018 Executive summary This thesis provides an analysis and evaluation of Sycamore Partners´ leverage buyout of Staples Inc. The purpose of this evaluation is to assess whether or not Sycamore Partners paid an appropriate price given the leverage buyout of Staples Inc. The method of evaluating the leverage buyout included, a theoretical understanding of a leverage buyout, a fundamental and strategic analysis of Staples leading to a comprehensive valuation through various valuation methods. Other analysis included an understanding of Sycamore Partners and their previous investments. The different valuation methods applied included a comparable valuation, precedent valuation, leverage buyout valuation and an adjusted present value valuation. The evaluation of the acquisition price, through the different valuation methods, resulted in an overall assessment deeming the acquisition price as appropriate, given an exit year of 2024 and an IRR hurdle rate of 20%. 1 Table of Contents PART 1 ................................................................................................................................................................ 6 1.1.Introduction ............................................................................................................................................. 6 1.2.Problem formulation ............................................................................................................................... 6 1.3.Methodology ........................................................................................................................................... 7 1.3.1.Thesis structure ................................................................................................................................ 7 1.3.2.Method and data .............................................................................................................................. 8 1.3.3.Limitations ........................................................................................................................................ 8 1.4.What is a LBO .......................................................................................................................................... 9 1.4.1.Mechanism of a LBO ....................................................................................................................... 10 1.4.2.Value creation in a LBO .................................................................................................................. 16 1.5.Staples, Inc. (target) .............................................................................................................................. 19 1.5.1.History ............................................................................................................................................ 20 1.5.2.Sector .............................................................................................................................................. 20 1.5.3.Products .......................................................................................................................................... 21 1.5.4.Customers ....................................................................................................................................... 21 1.5.5.Distribution ..................................................................................................................................... 22 1.5.6.Geography ...................................................................................................................................... 22 1.6.Sycamore Partners (sponsor) ................................................................................................................ 23 1.6.1.Business profile............................................................................................................................... 23 1.6.2.Sponsor type and target preferences ............................................................................................. 23 1.6.3.Investment strategy ....................................................................................................................... 24 1.6.4.Track record .................................................................................................................................... 25 1.6.5.Management .................................................................................................................................. 26 PART 2 .............................................................................................................................................................. 27 2.1.Valuation types ...................................................................................................................................... 27 2.2.Comparable valuation ........................................................................................................................... 28 2.2.1.Selection of comparable companies .............................................................................................. 28 2.2.2.Screening for comparable companies ............................................................................................ 28 2.2.3.Selected companies ........................................................................................................................ 29 2.2.4.Data of the comparable companies ............................................................................................... 30 2.2.5.Benchmark of comparable companies ........................................................................................... 32 2.2.6.Determining value .......................................................................................................................... 37 2.3.Precedent valuation .............................................................................................................................. 38 2 2.3.1.Selection of precedent transactions ............................................................................................... 38 2.3.2.Screening for precedent transactions ............................................................................................ 38 2.3.3.Selected transactions ..................................................................................................................... 39 2.3.4.Data of the precedent transactions ............................................................................................... 39 2.4.5.Benchmark precedent transactions ............................................................................................... 40 2.3.6.Determining value .......................................................................................................................... 41 2.4.Fundamental analysis of Staples Inc...................................................................................................... 43 2.4.1.The general picture ........................................................................................................................ 43 2.4.2.Creating value ................................................................................................................................. 44 2.4.3.Reorganizing the accounting statements ....................................................................................... 45 2.4.4.Reorganizing the reported balance sheet ...................................................................................... 45 2.4.5.Reorganizing the income statement .............................................................................................. 51 2.4.6.Operating lease .............................................................................................................................. 56 2.4.7.Pension adjustments ...................................................................................................................... 57 2.4.8.Cash flow ........................................................................................................................................ 58 2.4.9.Analysis of Office Depot ................................................................................................................. 59 2.4.10.Analyzing the performance .......................................................................................................... 64 2.4.11.Analysis of ROIC ............................................................................................................................ 64 2.4.12.Growth analysis ............................................................................................................................ 68 2.4.13.Fundamental analysis conclusion ................................................................................................. 72 2.5.Strategic analysis ................................................................................................................................... 73 2.5.1.The 20/20 strategy ........................................................................................................................