Staples LBO: Meet You on the Mezzanine

18 Pages Posted: 28 Aug 2017

See all articles by Elena Loutskina

Elena Loutskina

University of Virginia - Darden School of Business

Jon Meredith

University of Virginia - Darden School of Business

Donald Stevenson

Gist Learning LLC

Abstract

In this case, two friends, a managing director with an investment banking group and a partner at Cavalier Capital LLC have submitted a bit for a leveraged buyout (LBO) of retail giant Staples Inc. Staples seemed like an ideal LBO candidate: it was a large, stable company; it was a market leader with highly predictable cash flows; and, most important, its shareholders were unhappy. Markets also looked friendly for a new wave of LBOs: valuations were down, and banks were once again flush with cash and ready to lend.The two friends know they need to sweeten their 6.12× EBITDA bid, invest more in due diligence, and talk to management and the board of directors. They also know from experience that competition would inevitably draw bids in a relatively narrow range. They are considering expanding the debt profile through the judicious use of mezzanine financing. Prior to the global economic downturn, mezzanine had all but disappeared from view. Now that banks had grown more conservative in the amount of debt they were willing to provide, mezzanine financing was once again a crucial ingredient in ensuring a winning bid. There were many different combinations of debt packages that could be used to finance the LBO. Both friends had to make sure that the financing structure and the final bid were best suited not only for equity and mezzanine investors, but also for Staples.

Excerpt

UVA-F-1721

Aug. 23, 2017

Staples LBO: Meet You on the Mezzanine

“I met with Phelps briefly this morning, and the news is good,” reported Lyle Cunningham, a managing director with Jefferson Capital's investment banking group, to Bob Palmer, a partner at Cavalier Capital LLC and an old friend from business school, with whom he was having lunch. Cunningham was referring to Miles Phelps, the iconic New York investment banker. It was January 2013; a month earlier, Phelps had announced the sale of Staples Inc., the Boston-based retail giant, and had begun soliciting leveraged buyout (LBO) bids on its behalf. Cunningham and Palmer had submitted one such bid. “We've made it past the first round. Now it's time to actually talk to some folks up in Boston, refine our estimates, and increase the odds in our favor,” Cunningham said, obviously excited. Palmer smiled wryly. “Careful what you wish for,” he replied. “There's no Easy Button here.”

Everything about this deal looked exceptionally attractive. Staples seemed like an ideal LBO candidate: it was a large, stable company; it was a market leader with highly predictable cash flows; and, most important, its shareholders were unhappy. Markets also looked friendly for a new wave of LBOs: valuations were down, and banks were once again flush with cash and ready to lend. Staples was ripe for an LBO, so it did not surprise too many people on Wall Street when Phelps announced an auction.

. . .

Keywords: Staples, mezzanine financing, debt, leveraged buyout, LBO, private equity, investment banking

Suggested Citation

Loutskina, Elena and Meredith, Jon and Stevenson, Donald, Staples LBO: Meet You on the Mezzanine. Darden Case No. UVA-F-1721, Available at SSRN: https://ssrn.com/abstract=3027023 or http://dx.doi.org/10.2139/ssrn.3027023

Elena Loutskina (Contact Author)

University of Virginia - Darden School of Business ( email )

P.O. Box 6550
Charlottesville, VA 22906-6550
United States
434-243-4031 (Phone)

Jon Meredith

University of Virginia - Darden School of Business

P.O. Box 6550
Charlottesville, VA 22906-6550
United States

Donald Stevenson

Gist Learning LLC ( email )

514 Moseley Dr
Charlottesville, VA 22903
United States

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