Analysis: Essendant and SP Merger Abandoned

Analysis: Essendant and SP Merger Abandoned

(OCTOBER 2, 2018) - The proposed merger between US office products wholesalers Essendant and SP Richards (SPR) is off after the Essendant board recognized that an improved offer by Staples Inc was superior to the agreement with SPR owner Genuine Parts Company (GPC).

In the first week of September, Staples had reiterated its offer to acquire Essendant for $11.50 per share and urged the wholesaler’s shareholders to reject the SPR merger. Then, on 9 September, Staples made an improved offer for Essendant of $12.80 per share. This prompted the Essendant board to declare this proposal as “superior” to the terms of the GPC agreement, leaving GPC three business days from 11 September in which to come back with an offer that at least matched the Staples one.

However, GPC was quick to state that it would not make a counterproposal, asserting that its original April agreement with Essendant “accurately determined fair value for the transaction combining SP Richards and Essendant” and that it would keep SPR in the GPC fold – at least for now.

“We believe that the prospects for SP Richards remain strong and that there is significant opportunity for [it] to grow and deepen its relationships with both independent dealers and other customer channels,” GPC noted in a press release. “As such, we are confident in our ability to drive growth and profitability for SP Richards and to support value creation for GPC shareholders.”

Finally, on 14 September, Staples and Essendant confirmed they had entered into a definitive agreement based on Staples’ $12.80 offer that valued the wholesaler at almost $1 billion, including approximately $500 million in debt. This also signalled the termination of the Essendant/GPC agreement, entitling SPR’s parent company to a $12 million break-up fee – which Staples had already said it would pay.

“We believe combining with Staples provides a tremendous opportunity to enhance our resources and ability to serve customers, while delivering compelling and certain value to shareholders,” said Essendant CEO Ric Phillips. “I want to thank all our associates for their continued commitment and dedication as we have navigated this process over the past several months.”

Deal or no deal?

While both parties said they expected the transaction to be finalised during the fourth quarter of 2018, a couple of matters need to be resolved to get the deal over the line.

Firstly, approval by a majority of Essendant’s shareholders is required. This is made easier as Staples already owns more than 11% of Essendant’s common stock, but the wholesaler’s largest shareholder, Pzena Investment Management, has declared that it will oppose the transaction, commenting it is neither superior to the GPC agreement nor adequately values the company as a standalone business.

At the time of writing, the situation with Pzena was still ongoing and the investment firm said it expected to engage with Essendant’s senior management and possibly with “other relevant parties”. It is not anticipated that this move by Pzena will scupper the deal, but it may have enough influence to eke a few more cents out of Staples.

Secondly, the acquisition requires antitrust approval from the Federal Trade Commission (FTC). The FTC has already issued a second request to Staples as part of its investigatory process, but while there is expected to be some resistance from within the industry to a combined Staples/Essendant, OPI believes that the deal will not be blocked on competition grounds. - (OPI)