Dive Brief:

• Sycamore Partners, the private equity group that announced Wednesday it had agreed to acquire Staples for $6.9 billion, plans to split the office supply retailer into three separate businesses, according to a report Thursday in The Wall Street Journal that cited unnamed sources. A spokesperson for Sycamore Partners declined to comment on the story.
• The plan, according to the Journal, would break up Staples’ U.S. retail, Canadian retail and corporate-supply units into three separately financed entities under the same “corporate umbrella.”  As the Journal reports, “The move is designed to make the leveraged buyout of Staples ... an easier sell to bond and loan investors whose appetite for retail names has soured as the industry’s prospects have waned.”
• USB, Bank of America and other banks plan to arrange bonds and loans to finance the B2B unit, while Sycamore would finance the Canadian retail business with debt from KKR and the U.S. retail arm with an asset-backed loan through Wells Fargo, according to the Journal.

Dive Insight:

Staples’ ultimate fate is still far from certain even after Sycamore’s announced plan to acquire the office supply retailer.

As the Journal points out, Sycamore’s reported plan to split up Staples resembles how it approached the Jones Group acquisition in 2014, when it split the company’s brands into several separate units, two of which it sold off. One of the companies from that acquisition, Nine West, is struggling under its debt and has been listed on Fitch Ratings’ Bonds of Concern because of the risk it will default.

More broadly, Sycamore’s acquisition of Staples shows the bind many publicly traded retailers are in given the current investor and retail climate. Staples executives have been trying for years to find a way to bring sales and profitability up to please investors, including an attempt to buy rival Office Depot, a deal blocked by federal antitrust enforcers. In lieu of a sharp turnaround or large acquisition, the company is now offering stockholders a buyout.

“Managing the business to pacify shareholders requires short-term focus, which in our view is not only shortsighted but an act of self-sabotage because it sacrifices long-term gain,” wrote analysts with ratings firm Moody’s in a Thursday note emailed to Retail Dive. “In our view, this makes Staples’ long-term survival more challenging.”

Moody’s described the Staples acquisition as a “tipping point” for retailers that signals the company believes “the only way to enhance shareholder value is to sell itself to a sponsor — a move that could have ripple effects across retail.”

The analysts, led by Charles O’Shea, a vice president and senior credit officer with Moody’s, point out that Staples has developed a successful online retail model, third in the pack behind Amazon and Walmart. But stockholders — with the notable exception of Amazon shareholders — have shown little patience with retailers who invest sizable capital in online sales channels and other areas that could boost future sales.

“That doesn't augur well for others,” Moody’s analysts write. “We believe the Staples LBO means that retail boards are coming under more intensive pressure as they juggle shareholder interests with growth objectives. Necessary short-term investment for long-term benefit can stress earnings (similar to Amazon), and hurt share prices (dissimilar to Amazon). Considering this dynamic, we would not be surprised to see more retailers pursuing LBOs going forward.”

And that could be bad news for retailers. Debt legacies from leveraged buyouts can drive retailers into bankruptcy years down the road, as we’ve seen with Gymboree, Gordmans, rue 21 and others.

That said, there are advantages to going private. “The opportunity for retailers to go private is to give them the space they need to reinvent their brands, redo their store formats, and emerge a much stronger retailer," Steve Barr, a partner and the U.S. retail and consumer sector leader at PricewaterhouseCoopers, previously told Retail Dive.