1 DeborahWeinswig,ManagingDirector,FungGlobalRetail&Technologydeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2017TheFungGroup.Allrightsreserved.

June30,2016

Sycamore Partners to Acquire Staples for $6.9 Billion

1) SycamorePartnerswillacquireUSofficesuppliesretailerStaplesinaleveragedbuyoutdealfor$6.9billion.

2) Stapleshasbeensufferingfromincreasingcompetitionandslowingdemandforofficesupplies,whileitsattemptedmergerwithOfficeDepotwasblockedonantitrustgroundsin2016.

3) Theleveragedbuyoutdealisexpectedtoallowthecompanymoreleewaytorestructureandbetterpositionitsbusinessamidcurrentheadwinds.

StaplestobeAcquiredbySycamorePartnersinaLeveragedBuyoutDealSycamorePartnerswillacquireUSofficesuppliesretailerStaplesinaleveragedbuyoutdealforabout$6.9billion,or$10.25pershare.Theofferrepresentsa12%premiumtothe share’s closing price on Tuesday. We expect the deal to provide leeway for theoffice-supplychaintobetterpositionitsbusinessamidpersistingchallenges.Theoffice-supplychainhasbeensufferingfromthreemajorheadwindsinrecentyears:

• The digital transformation of workplaces has reduced the demand for officesuppliessuchasprinterpaperandpens.

• Online competition, particularly from Amazon, has shrunk themarket for officesuppliessoldinstores.

• There has been a shift in small businesses, Staples’ primary retail customers, tocompetitorssuchasCostcoforbetterpricing.

FailuretoTransformAmidHeadwindsIn2015,StaplesofferedtomergewithOfficeDepotina$6.3billiondealtocombinethetwo largestoffice-supply chains in theUS.However, the transactionarousedantitrustregulators’concernsandfailedtoobtainapprovalfromtheregulators.

2 DeborahWeinswig,ManagingDirector,FungGlobalRetail&Technologydeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2017TheFungGroup.Allrightsreserved.

June30,2016

StaplesthendivestedbusinessesoutsideofNorthAmericaandtookactiontoincreasepenetration with mid-market commercial customers. However, the actions failed tocurbthedeclineinthecompany’ssame-storesalesortoimprovethebottomline.

Figure1.Staples’Same-StoreSalesinNorthAmerica(%)

Source:Bloomberg

Figure2.Staples’NetIncome/(Loss)(USDMil.)

Source:Bloomberg

LeveragedBuyoutDealtoProvideLeewayforBusinessTransformationTheleveragedbuyoutdealwillallowthecompanymoreleewaytobetterpositionitsbusinessamidcurrentheadwinds.Thedemandforofficesuppliesfromcorporationsandthegovernment,whichaccountformorethan60%ofStaples’revenue,arelessimpactedbytheseculardeclinesexperiencedbythemajorityofretailersintheUS.However,StapleswillneedtorestructureitsbusinesstocompetemoreeffectivelywiththelikesofAmazonandCostco,whichthecompany’smanagementhasidentifiedasmajorcompetitors.

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3 DeborahWeinswig,ManagingDirector,FungGlobalRetail&Technologydeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2017TheFungGroup.Allrightsreserved.

June30,2016

Underprivateownership,Staples’planstofocusonthemid-andhigh-endmarketsandtoreduceitsrelianceonretaillocationscouldimprovethetopandbottomlineintheshorttomediumterm.However,weanticipatethatrepositioningthebusinesstoenablesustainablelong-termgrowthwillbenoeasyfeat.TherearebigquestionstobeansweredaroundhowStapleswillcompetemoreeffectivelyagainstAmazonandWalmart,whicharebothmakingsignificantinvestmentsinomnichannelretail,aswellashowthecompanywillrepositionitsbusinesstoserveclientswithofficeenvironmentsthatareincreasinglydigital.

4 DeborahWeinswig,ManagingDirector,FungGlobalRetail&Technologydeborahweinswig@fung1937.comUS:917.655.6790HK:852.6119.1779CN:86.186.1420.3016Copyright©2017TheFungGroup.Allrightsreserved.

June30,2016

DeborahWeinswig,CPAManagingDirectorFungGlobalRetail&TechnologyNewYork:917.655.6790HongKong:852.6119.1779China:86.186.1420.3016deborahweinswig@fung1937.comCharliePoonResearchAssistant

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