What To Make Of The Staples Buyout

Summary

• Staples will be bought out at $10.25 per share.
• Some share price appreciation and the company's dividends provide total return potential until the deal closes.
• Holding Staples' shares until the deal closes has a good chance of beating the broad market.

Thesis

Staples (NASDAQ:SPLS) getting bought out gives current owners two options: Hold until the deal closes, or sell at the market. I believe holding the shares until the deal closes has a good chance of delivering market-beating returns.

The above golden piggy bank could be a symbol for the cash Staples' owners will be receiving once Sycamore closes the acquisition of the company, which has been announced late last week.

With the deal valuing Staples at $10.25 per share, let's look at the good thing first:

SPLS data by YCharts

Everyone who bought Staples' shares over the last year will be able to close the position with a positive total return, although that is not necessarily true for those who bought earlier -- basically everyone who bought in 2014 or 2015 and has been holding the company's shares since will have lost money once the deal closes.

With Staples trading at $10.07 right now, investors are standing before a choice: Either sell at the market for immediate gains and locking in the profits, or waiting for the acquisition to close, for a higher absolute return (although that return is not guaranteed yet).

Let's look at the outcomes for an investor holding the company's shares until the deal closes:

Deal closes in	Share price appreciation	Dividends	Total return (absolute $ amount)	Total return (annualized)
3 months	$0.18	$0.12	$0.30	12.2%
6 months	$0.18	$0.24	$0.42	8.3%
9 months	$0.18	$0.36	$0.54	7.1%
12 months	$0.18	$0.48	$0.66	6.4%

Click to enlarge

We see that, as long as the deal closes over the next year, investors will see a total annualized return of at least mid single digits, which is not bad at all. There is, however, some risk that the deal does not happen, e.g. due to regulatory authorities not allowing the takeover (however I believe that that risk is very small). Nevertheless the deal not happening would mean that Staples' shares would very likely drop back to $9, where shares traded before the announcement. In that case investors would see a negative return of roughly ten percent.

If, on the other hand, an investor sells his shares right now (at the current market price) and puts his or her money elsewhere, the gains the shares made over the last days are locked in and can not be taken away any more. Putting the money into other stocks has the potential for much higher gains, although the broad market will not necessarily beat the mid single digits (or higher) total returns that investors could get from Staples:

As Bloomberg reports, the year end estimate for the S&P500 (SPY) index is less than one percent higher than the current level of the index, thus the total return over the next half year (dividends included) is less than two percent -- or about four percent annualized. Holding Staples until the deal closes has thus a good chance of beating the broad market over the next months, even though there are other stocks that will provide even higher returns (it is hard to forecast which stocks that will be, unfortunately).

Takeaway

Staples' shares jumped after the announcement of the proposed takeover, but shares still should be able to provide at least mid single digits annualized returns until the deal closes. There is a small risk of the deal not getting approved, which would make Staples' shares drop about ten percent, but that is relatively unlikely.

Holding Staples until the deal closes has a good chance of delivering returns that will turn out to be better than those of the broad market, as analysts are forecasting that the S&P 500 index will move up just very slightly over the next months.

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Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.