Staples 2015 Annual Report Download - page 86

FORWARD-LOOKING STATEMENTS
8 STAPLES Form 10-K
As part of the integration process we may also attempt to
divest certain assets of the combined company, which may
not be possible on favorable terms, or at all, or if successful,
may change the profile of the combined company. The
European Commission approved the merger on the condition
that Staples divest Office Depot’s European contract business
and all of Office Depot’s operations in Sweden. Staples and
Office Depot have announced that they will also divest Office
Depot’s retail, online and catalog operations in Europe in
connection with closing the transaction. In addition, Staples
and Office Depot have announced an agreement to sell more
than $550 million of office products revenue and related assets
to Essendant in connection with closing the transaction. We
may be subject to additional remedies, such as restrictions
on our operations and the divestiture of additional assets, in
connection with seeking antitrust clearance for the merger.
We will incur significant indebtedness in connection
with the merger, which could reduce our flexibility to
operate our business and increase our interest expense.
In connection with the planned acquisition, we have obtained
financing commitments from Bank of America, N.A. and Merrill,
Lynch, Pierce, Fenner & Smith Incorporated (“Bank of America
Merrill Lynch”) and Barclays Bank PLC (“Barclays”) and other
banks and investors for a 5-year $3 billion asset-based
revolving credit facility (the “ABL Facility”) and for a 6-year
$2.5 billion term loan (the “Term Loan”). In February 2016,
we drew the proceeds of the Term Loan and placed them in
escrow with JPMorgan Chase Bank, N.A. The proceeds of
the Term Loan will be released from escrow to the Company if
certain conditions are satisfied, including consummation of the
merger, or repaid to the lenders together with accrued interest
and fees if the conditions are not met by September 10,
2016 (subject to extension to November 10, 2016 under
certain antitrust-related circumstances). We also extended
the commitment period for the ABL Facility. Pursuant to the
amended and restated debt commitment letter, the extended
commitments will expire on May 10, 2016 unless, prior to
5:00 p.m. on such date, the Federal Trade Commission
agrees, or a court of competent jurisdiction determines, that
the merger is permitted to proceed in accordance with the
merger agreement, in which case the commitments will be
extended to September 10, 2016.
This indebtedness could have the effect, among other things,
of reducing our flexibility to respond to changing business and
economic conditions, and increasing interest expense. We will
also incur various costs and expenses associated with our
indebtedness. The amount of cash required to pay interest
on our increased indebtedness levels following completion of
the merger, and thus the demands on our cash resources,
will be greater than the amount of cash flows required
to service our indebtedness prior to the transaction. The
increased levels of indebtedness following completion of the
merger could also reduce funds available for working capital,
capital expenditures, acquisitions and other general corporate
purposes and may create competitive disadvantages relative
to other companies with lower debt levels. If we do not achieve
the expected benefits and cost savings from the merger, or
if the financial performance of the combined company does
not meet current expectations, then our ability to service our
indebtedness may be adversely impacted.
In addition, our credit ratings affect the cost and availability
of future borrowings and, accordingly, our cost of capital.
Our ratings reflect each rating organization’s opinion of our
financial strength, operating performance and ability to meet
our debt obligations. In connection with the debt financing,
we have sought ratings of our indebtedness from certain
nationally recognized statistical rating organizations. On
April 6, 2015, Standard & Poor’s Rating Services announced
that it had assigned Staples a BBB rating on the term facility
with a recovery rating of 1, and that it expects to lower Staples’
corporate credit rating from BBB- to BB+ with a stable outlook
upon closing of the merger. On April 14, 2015, Moody’s
Investor Service announced that it had assigned a Baa2 rating
to the term facility, and noted that all ratings of Staples remain
on review for downgrade. There can be no assurance that we
will receive or maintain a particular credit rating.
Moreover, we may be required to raise substantial additional
financing to fund working capital, capital expenditures,
acquisitions or other general corporate requirements. Our
ability to arrange additional financing or refinancing will
depend on, among other factors, our financial position and
performance, as well as prevailing market conditions and other
factors beyond our control. There can be no assurance that
we will be able to obtain additional financing or refinancing on
terms acceptable to us or at all.
The agreements that govern the indebtedness incurred
in connection with the merger contain various covenants
that impose restrictions that may affect our ability to
operate our businesses.
The agreements that govern the Term Loan, and that will
govern the ABL Facility if we enter into it in connection with the
merger, contain (or, in the case of the ABL Facility, are expected
to contain) various affirmative and negative covenants that,
subject to certain significant exceptions, restrict our ability to,
among other things, incur indebtedness or guarantees; incur
liens; make investments, loans and acquisitions; consolidate or
merge; sell assets, including capital stock of our subsidiaries;
pay dividends on capital stock or redeem, repurchase or retire
capital stock; change lines of business; amend, prepay, redeem
or purchase certain debt; engage in transactions with affiliates;
and enter into agreements containing negative pledge clauses
or clauses that limit subsidiary dividends and distributions.
In addition, these agreements contain (or are expected to
contain, as applicable) financial covenants that will require
us to maintain certain financial ratios. Our ability to comply
with these provisions may be affected by events beyond our
control. Failure to comply with these covenants could result
in an event of default, which, if not cured or waived, could
accelerate our repayment obligations. In addition, the terms of
the definitive agreements that govern the Term Loan, and that
will govern the ABL Facility if we enter into it, restrict us from
paying dividends in certain circumstances and otherwise in an
amount in excess of $0.15 per share per quarter, subject to
certain exceptions.
Sales of shares of our common stock before and after
the completion of the proposed Office Depot merger
may cause the market price of our common stock to fall.
As of February 21, 2015, we estimated that we would issue
up to approximately 128 million shares of our common stock
in connection with the proposed Office Depot merger, subject
to adjustment based on the number of outstanding shares
and equity awards of Office Depot at the time the merger is
completed. The anticipated dilutive effect of the issuance of
these new shares could negatively impact the market price for
our common stock.
In addition, Office Depot stockholders may decide not to hold
the shares of our common stock they receive in the proposed
merger. Other Office Depot stockholders, such as funds with