Proposed Acquisition of Office Depot (Notes)

12 Months Ended

Jan. 30, 2016

Business Combinations [Abstract]

Proposed Acquisition of Office Depot

Proposed Acquisition of Office Depot

On February 4, 2015, Staples announced that it had signed a definitive agreement to acquire Office Depot, a global supplier of office products, services and solutions for the workplace. Under the terms of the agreement, Office Depot shareholders will receive, for each Office Depot share, $7.25 in cash and 0.2188 of a share in Staples stock at the closing.

On December 7, 2015, the U.S. Federal Trade Commission and Canadian Commissioner of Competition each filed lawsuits against the Company and Office Depot, seeking to block the proposed merger and prevent the acquisition from closing. The Company intends to vigorously defend against the lawsuits, and a decision in the U.S. federal court case is expected by May 10, 2016. On February 2, 2016, each of the Company and Office Depot agreed to waive, until May 16, 2016, its respective rights to terminate the definitive agreement due to a failure to complete the merger by February 4, 2016 or a legal restraint under antitrust laws. The Company would be required to pay Office Depot a termination fee of $250 million under certain circumstances, including if the definitive agreement is terminated as a result of the antitrust closing conditions not being satisfied on or before May 16, 2016.

On February 10, 2016, the Company announced that it had received approval from European Union regulatory authorities to acquire Office Depot, on the condition that Staples divest Office Depot’s European contract business and all of Office Depot’s operations in Sweden. The Company intends to meet these conditions, and to also divest of Office Depot’s retail, catalog and online operations in Europe. The divestitures are subject to the closing of the acquisition. The Company has also received regulatory clearances in Australia, New Zealand and China.

On February 16, 2016, Staples and Office Depot announced they had entered into an agreement to sell customer contracts representing more than $550 million of revenue and related assets to Essendant Inc., for a purchase price of approximately $22.5 million. The revenue related to the divested contracts comes primarily from large corporate customers. The divestiture is subject to the closing of the Office Depot acquisition, as well as other customary closing conditions.

In 2015 the Company incurred expenses of $53 million in connection with the planned transaction, primarily related to professional services associated with obtaining regulatory clearances. These amounts are included in Selling, general and administrative expense in the consolidated statements of income. The Company also incurred fees related to commitments for financing for the transaction, as discussed below.

Transaction Financing

In connection with the proposed acquisition, on February 4, 2015 the Company announced it had obtained financing commitments from Bank of America Merrill Lynch and Barclays Bank, PLC ("Barclays") for a 5-year $3 billion asset-based revolving credit facility and a 6-year $2.75 billion term loan.  The original commitments were scheduled to expire on February 4, 2016. During 2015 the Company incurred commitment and other related fees of $94 million related to the term loan, which have been classified as interest expense in the consolidated statements of income. Of this amount, $2 million was paid in 2015, $68 million was paid on February 2, 2016, and $24 million is payable upon closing or termination of the proposed acquisition.

On February 2, 2016, the Company entered into (i) the definitive term loan agreement with the syndicate of lenders, and Barclays as administrative agent and collateral agent, for a principal amount of $2.5 billion, and (ii) an agreement pursuant to which Bank of America Merrill Lynch and Barclays agreed to extend their existing financing commitments for the 5-year $3 billion asset-based revolving credit facility.

The net proceeds from the $2.5 billion term loan were deposited into escrow accounts.  The term loan was issued with an original issue discount equal to 1.0% of the par value of the loan. The loan proceeds will be released from escrow to the Company if certain conditions are satisfied, including consummation of the merger, by September 10, 2016 (which may be extended to November 10, 2016 under certain antitrust-related circumstances).  If the proceeds are released from escrow, the term loan will mature on the earlier of (1) February 2, 2022, and (2) the date that is 91 days prior to the final maturity date then in effect for Staples’ currently-outstanding 2.75% senior notes due January 2018 if, at such time, the principal amount of outstanding senior notes is $300 million or greater. If the merger is not consummated or if the conditions are not otherwise met, the par value of the term loan and all accrued interest will become immediately due and payable.

Borrowings under the term loan bear interest at a rate per annum equal to, at the Company's option, either (1) an adjusted London interbank offered ("LIBO") rate with a floor of 0.75% (the "Adjusted LIBO Rate"), plus an applicable margin equal to 4.00%, or (2) a base rate determined by reference to the highest of (a) the U.S. federal funds rate plus 0.50%, (b) the “prime rate” last quoted in The Wall Street Journal, (c) the Adjusted LIBO Rate for an interest period of one month, plus 1.00% and (d) 1.75%, in each case plus an applicable margin equal to 3.00%.  As of February 2, 2016, the outstanding loan balance under the term loan agreement bore an initial interest rate of 4.75% per year, which is subject to adjustment from time to time as provided for in the term loan agreement. If the proceeds are released from escrow, the term loan will be secured by a first priority security interest in substantially all of the assets of the Company, other than the ABL Collateral (defined below), and a second priority security interest in the ABL Collateral.

The commitments for the asset-based revolving credit facility will now expire on May 10, 2016 unless prior to that date the FTC agrees, or a court determines, that the planned merger is permitted to proceed, in which case the commitments would be extended to September 10, 2016. The asset-based revolving credit facility would replace the Company's existing $1.0 billion revolving credit facility (see Note F - Debt and Credit Agreements).   The Company's existing $1.0 billion revolving credit facility will remain in place if the transaction is not completed. Amounts outstanding under the asset-based revolving credit facility will bear interest equal to the one month London Interbank Offered Rate ("LIBOR") plus 1.75% for the first three months, and then ranging from LIBOR plus 1.25% to 1.75% thereafter depending on the amount of available borrowing capacity and the amount of outstanding borrowings and letters of credit.  The Company will also pay fees ranging from 0.25% to 0.375% on the undrawn portion of the credit facility.  Amounts outstanding will be secured by a first-priority security interest in the Company’s receivables, inventory and certain other general intangibles and investment property (the “ABL Collateral”) and a second-priority interest in substantially all the remaining assets of the Company.  Availability under the asset-based revolving credit facility will be subject to a borrowing base derived from the ABL Collateral.

The agreements that govern the term loan and that will govern the asset-based revolving credit facility contain (or are expected to contain, as applicable) various affirmative and negative covenants that will, subject to certain significant exceptions, restrict the Company’s ability to take certain actions, and will require the Company to maintain certain financial ratios. The terms of these agreements will limit dividends to $0.15 per share per quarter, subject to certain exceptions.

The Company expects that the proceeds from the term loan, borrowings available under the asset-based revolving credit facility, and cash on hand will be sufficient to finance the acquisition of Office Depot.