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There Can Be Only One

04 February 2015 by lberuti

In an effort to avoid the fate of RSH (RadioShack Corporation) which seems bound to file for bankruptcy protection, SPLS (Staples Inc) and ODP (Office Depot Inc) have been linked for a while. They eventually announced a deal overnight, in which SPLS will buy ODP for $7.3Bln. That will reduce the US office-supply industry to a single major chain and will probably test the limits of anti-trust regulators. Even though investors suspected a transaction was coming, the cash element was always the big question mark. It came at the higher end of people’s expectations, and the deal will require $4.3Bln in new debt. The company leverage should go from up from the current 3x to 4.25 or 4.5x depending on the synergies they can achieve. There should be a multi-notch downgrade and analysts expect the 5 year risk premium to trade close to 300bps if the acquisition go through. As it is not a done deal, the CDS stopped at 220bps, but that is still a good 45bps wider on the day.