Sycamore Partners, the private equity firm that still has faith in retail—and in selling products to office managers—is making its biggest bet yet.

On Wednesday, it agreed to acquire Staples Inc. for about $6.9 billion in one of the largest retail deals of the year, a wager that the office-supply chain can re-emerge as a modern seller of business services.

The transaction, which was predicted in reports last week, lets Staples escape Wall Street’s glare and focus on a turnaround plan that includes reducing its retail footprint. But it’s hard to tell how the buyout will fix its fundamental challenges, including the rapid migration of customers to Amazon.com Inc. and slackening demand for traditional office supplies.

“This doesn’t change the industry dynamics or the pressures the retailer faces,” said Seema Shah, an analyst at Bloomberg Intelligence.

In recent years, Staples and its main rival, Office Depot Inc., have each been striving to re-make their businesses, with a strong focus on selling to companies. Each has expanded its product lines beyond basic office supplies like paper and ink to provide a broader range of items to small and mid-sized businesses.

Earlier this week, Office Depot launched a business-to-business advertising campaign focused on selling products and services to businesses—a move similar to one made earlier this year by Staples. Staples is No. 22 in the B2B E-Commerce 300; Office Depot is No. 42. In the Internet Retailer Top 500, Staples is No. 5; Office Depot, No. 9.

Shira Goodman, CEO,
Staples

Staples president and CEO Shira Goodman has called its Staples Business Advantage unit, which caters mostly to mid-size business customers, the “growth engine of our company.”

Sycamore, saying it was attracted to Staples’ “iconic brand,” is paying $10.25 a share for the retailer, according to Wednesday’s statement. That represents a 12% premium to its share price on Tuesday, before reports surfaced that the transaction was close to be being completed.

Staples shares jumped as much as 2.1% to $10.14 in early trading on Thursday—still short of the acquisition price.

According to a report in the Wall Street Journal, Sycamore plans to split Staples into three separately financed operating entities under the same corporate umbrella: its corporate-supply business, including e-commerce sites StaplesAdvantage.com and Quill.com; its U.S. retail business, including Staples.com and Staples stores; and its Canadian retail business, including Staples.ca and its stores in Canada. Sycamore expects the separation into three entities will make it easier to drum up investment for its leverage buyout of Staples, the report says. Neither Staples nor Sycamore commented.

The Sycamore deal caps more than a year of turmoil for Staples, which was thwarted in an attempt to make its own acquisition in May 2016. The company tried to buy Office Depot Inc. for $6.3 billion to unify the two largest office-supply sellers, but aborted that effort after the transaction was opposed by antitrust regulators.

After its bid for Office Depot failed, Staples CEO Ron Sargent stepped down and the company scrambled for a Plan B.

Under new CEO Goodman, Staples closed stores and sought to recast itself as a source of business services.

“With the support of Sycamore and as a private company, we will be better equipped to continue to transform to meet changing customer needs in an ever-evolving and competitive marketplace,” Goodman said in an emailed statement.

“This transaction will enable us to drive greater value for our customers and immense opportunity for our business,” Goodman said in statement yesterday announcing the deal, which is expected to close not later than December.

Robert Sulentic, chairman of Staples, said in a statement released late yesterday that the Staples board and its advisors had considered “various alternatives” for the company’s future course. “Staples’ board believes that this process has led to a transaction which is in the best interest of our stockholders as well as Staples and its employees.”

Marketing Pivot

Last month, Staples overhauled its marketing to pivot away from its roots — selling low-priced office supplies at big stores. Its new TV ads don’t show stores, instead focusing on office managers at work.

But sales continued to decline at the company, which began discussing buyout possibilities with private equity firms. Bloomberg reported in May that Staples had rejected a takeover offer from Cerberus Capital Management because it was too low. That left Sycamore in the lead to acquire the retail chain.

The first Staples store was opened by former supermarket executive Tom Stemberg in Brighton, Massachusetts, in 1986. According to company lore, he was inspired to start the retailer because his typewriter ribbon broke over Fourth of July weekend and he couldn’t find a replacement.

The company, now based in Framingham, Mass., expanded quickly in the 1990s and early 2000s using a tagline “That was easy.” But the digital revolution took a toll on the chain. E-commerce sales hurt brick-and-mortar demand, and many businesses are using less paper, ink and other supplies.

In May, Staples reported that first-quarter sales dropped 4.9 percent from the previous year to $4.1 billion. It shut 18 stores in North America during that period, leaving it with 1,237 locations in the U.S. and 304 in Canada.

Belk Deal

Sycamore, founded by Stefan Kaluzny and Peter Morrow, raised $2.5 billion for its second fund in 2014. The Staples acquisition would be the biggest deal to date for the firm. It previously acquired department-store chain Belk Inc. for $2.7 billion.

The Staples acquisition is slated to close by the end of 2017. Sycamore lined up financing from UBS Group AG, Bank of America Corp.’s Merrill Lynch, Deutsche Bank AG, Credit Suisse Group AG, Royal Bank of Canada, Jefferies Group LLC, Wells Fargo & Co. and Fifth Third Bank. Merrill Lynch and Deutsche served as the firm’s financial advisers, while Kirkland & Ellis LLP provided legal help.

Michael Freitag, a spokesman for Sycamore, declined to comment beyond the statement.

Staples, meanwhile, got financial advice on the deal from Barclays Plc and Morgan Stanley. Wilmer Cutler Pickering Hale & Dorr LLP was its legal adviser.

The debt brings new potential challenges, Shah said.

“The risk is, of course, that sales and margins continue to be under pressure and that the retailer struggles to service its debt,” she said.

Sycamore is known for seeking retail brands and trying to turn them around. But Staples has been striving to shed its retail image. By 2020, the company expects to get only 20 percent of revenue from retail locations, down from about 40% now. The rest will be generated by delivery and online sales.

“The Sycamore Partners’ team shares Staples’ entrepreneurial spirit and long-term vision,” Goodman said in the statement. “This transaction will enable us to drive greater value for our customers and immense opportunity for our business.”

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