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Just about a month after Genuine Parts Company entered into a merger agreement to combine Essendant and GPC’s S.P. Richards business in a deal valued at $680 million, Essendant Inc. (Nasdaq: ESND) has confirmed that it received an unsolicited proposal from Staples, Inc. to acquire all shares of Essendant stock for $11.50 per share in cash.
The private-equity owner of Staples, Sycamore Partners, already owns about 10 percent of Essendant. The FTC shut down Staples’ attempted acquisition of Office Depot in 2015, arguing that the combination would lead to higher prices for office supplies. But both political and market factors have shifted quickly, and the relative market positions of Essendant and SPR make for a significantly different story for the competitive impact to their respective customers. (See my analysis last month – Deal Analysis: Essendant and S.P Richards Merger Offers Hope and Time.)
Essendant and Genuine Parts Company entered into a merger agreement on April 10, 2018 to combine Essendant and GPC’s S.P. Richards business in a deal valued at $680 million, including a one-time cash payment to GPC of $347 million. The merged business products wholesaler has pro forma 2017 net sales of about $7 billion and more than $200 million in adjusted EBITDA. The merger agreement with GPC remains in effect, and the Essendant board of directors has not changed its recommendation that Essendant's shareholders vote in favor of that transaction.
A week later, on April 17, Staples communicated its initial proposal to Essendant, which Essendant declined after thorough review by its board in consultation with its financial and legal advisors. Staples sent a revised proposal on April 29 stating that it believed it will be able to identify incremental value opportunities to enable it to increase its offer significantly in excess of $11.50 per share after receiving confidential information and engaging in discussions with Essendant. On May 4, in consultation with its financial and legal advisors, Essendant's Board determined that Staples' revised proposal is reasonably likely to lead to a "Superior Proposal" as defined in the merger agreement with Genuine Parts Company ("GPC"). There can be no assurance that the Staples proposal will result in a transaction.
On May 7, 2018, GPC made an enhanced proposal to the previously announced merger agreement with Essendant under which Essendant shareholders would be provided a nontransferable right to a contingent cash payment following completion of the merger and based on the subsequent trading price of Essendant shares. The contingent payment would have a maximum value of $4.00 per share and a minimum value of zero. Specifically, the contingent payment would be equal to $12.00 per share minus the greater of (a) the weighted average price of Essendant shares during a 20-day measurement period ending at the later of (i) December 31, 2019 or (ii) the 12-month anniversary of closing, or (b) $8.00, subject to other terms and conditions. There can be no assurance that the GPC merger agreement will be amended to incorporate this proposal.
The deal structure for the GPC-Essendant deal is a definitive merger agreement to combine Essendant and GPC's S.P. Richards business in a Reverse Morris Trust transaction. Upon closing of the transaction, GPC shareholders will own approximately 51% and Essendant shareholders will own approximately 49% of the combined company.
As I noted last month, the deal with GPC buys Essendant time to build a differentiation strategy to combat a long list of competitors – digital, retail and otherwise – that have decimated traditional distribution channels for office products. Those in the sector view the deal as practically inevitable – a combination of competitors that serve a shared market of smaller, independent office products dealers.
It’s a strong exit strategy for GPC, with $16 billion in 2017 revenues, allowing it to focus on strengthening capabilities in automotive, industrial and electrical markets with NAPA (53 percent of revenues), Motion Industries (35 percent of revenues) and EIS (5 percent of revenues). SPR currently makes up 12 percent of that pie. Of the sectors GPC operates in, SPR’s traditional customers of smaller independent office products dealers are perhaps the most vulnerable to the entry of disruptive competitors over the past ten years.
In the spirit of the first month of baseball season, I also commented last month that the combination of Essendant and S. P. Richards solves some immediate problems for both managers; the big question is whether the new team runs out of innings before it learns how to play together. With the Staples bid, you have to wonder whether that game will be called on account of raining offers.
Essendant's confirmation follows its Schedule 13D filing with the U.S. Securities and Exchange Commission by Staples, Inc., Sycamore Partners and certain affiliates disclosing a 9.9% ownership stake in Essendant. Staples is a portfolio company of Sycamore Partners. Investment firm Blackrock holds major positions in both GPC and Essendant, owning more than 10 percent of the stock in both companies.
Citigroup Global Markets Inc. is acting as financial advisor and Skadden, Arps, Slate, Meagher & Flom LLP is acting as legal counsel to Essendant.