S&P Global Ratings has downgraded Staples Inc. to B+ from BBB- due to concerns about the office supply retailer's debt burden following the company's announced merger deal with private equity firm Sycamore Partners, according to an Aug. 8 note.
S&P Global Ratings said in the note that Sycamore Partners plans to spin off Staples' retail store operations and keep the remaining company as a business-to-business distributor with an estimated annual revenue of $10 billion. To help finance this transaction, Staples will issue about $4.25 billion of new debt, while Sycamore Partners will contribute $1.6 billion of common equity, according to the note. This means "meaningfully weaker" credit metrics for the office supply retailer, S&P Global analysts said.
Staples announced the merger agreement with Sycamore on June 28, stating that the private equity firm will acquire Staples for approximately $6.9 billion if the deal is completed. Staples' board of directors unanimously approved the deal, which is pending approval by stockholders and customary closing conditions and expected to close by December.
"The ratings reflect our assessment of the company's substantial debt burden and our view of the Staples' business-to-business operation post-transaction close," the analysts said. "We believe Staples faces intense competition in the office supply distribution business, limited entry barriers and low customer switching costs."
S&P Global's outlook for Staples, however, is stable based on the company's position in the office supply business. The analysts would consider lowering the rating if competition increased with other office supply players, according to the note, and do not expect to raise the rating.
"We think it is unlikely we could raise the ratings in the next year given the substantial amount of transaction-related debt that hurt credit metrics," the analysts said. "An upgrade would also be predicated on market share gains and consistent profit growth."
S&P Global Ratings and S&P Global Market Intelligence are owned by S&P Global Inc.