Feeding time?

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On Friday 16 September Staples became the rightful owner of Prime Office Products for an undisclosed sum. It was the company’s first US acquisition since it bought TriMega dealer group member Hartford Office Supply in September 2004.
Jay Baitler, EVP of the company’s North American contract division, describes Prime as a "perfect and comfortable fit". He told OPI: "They are great people, great managers and they are growing aggressively. They also have high ethics and high intensity. I have been in the contract business for 30 years and I have known many of the people at Prime for 25 years… It is a marriage in the way that we view our customers and associates."
Prime, which enjoys annual revenues of approximately $135 million, was not available for comment. Formed in April 1999 to partner through acquisition with leading US dealers, the company is headquartered in Nashville, Tennessee.

 

Logical
Prime’s local market offices fall predominantly in the north-eastern quarter of the US, in states such as Indiana, Illinois, Ohio, Pennsylvania, Maryland, DC/Virginia and Kentucky. But the group also enjoys a significant presence in the southern states of Georgia, Alabama, Oklahoma and Texas. In addition, there is a local office in California.
Baitler claims the move is not really to move Staples into new markets. "Prime has significant centres of revenue in the US, which overlay fairly well with our existing presence in markets," he says. "We organically move into new markets ourselves every year. Last year, for example, we went into St Louis and Kansas City." Baitler describes Prime as being "close to a virtual dealer model, being 74 per cent supported by wholesalers," and so offering Staples a broad set of products and "more opportunities for Staples contract folk" as a result of the buy.
The independent dealer community agrees that Staples’ acquisition was a logical move. With Wall Street discontent with organic growth alone, Staples needs to continue to feed its top line and a company that enjoys approximately $135 million in quarterly revenues will go a long way to help. "With Staples having a balance sheet that you would write home to mother about, why not expend the capital and acquire well-run, mid-large independents where wholesale volume as a percentage of overall revenue is significant," says Mike Gentile, president/CEO of is.group.
"I think it is an easy way to add sales and Prime was many different companies in different locations," adds Michael Brown, CEO of Allied. "I think it is an easy fit for Staples from an integration standpoint."
Dan Binder, SVP at Buckingham Research Group, says that the company assured him the move was a fill-in strategy. "Staples is fairly disciplined, so I think that when it finds a chunk of business up for sale and it believes that’s a good operator, there is a willingness to pay a reasonable price rather than have to build it themselves… What was surprising to me about this acquisition was Staples’ willingness to buy an operation that was a rollup of several companies. Typically, these have been a little trickier to integrate. It isn’t that big though, so I’m not too worried on that standpoint."
The main challenge for Staples going forward will be account retention, claims Gentile. Big boxes have a much higher turnover rate than independents, which generally do a better job of creating value in account servicing relationships. With this in mind, dealers will no doubt start competing aggressively for customers of the former Prime, which was known to have a very strong service orientation.
As Ed Walper of Impact Office Products says: "Short-term, I see this as taking a key competitor off the streets and adding opportunity for independents in former Prime markets."
Baitler adds that Prime also stands to benefit from the move. "There will be significant opportunities for Prime associates growing at Staples’ growth rate…and the company will be boosted by a broader, more state-of-the-art distribution network, better service and better product penetration," he says. The independents have largely rallied round Prime’s decision to be bought out by Staples. "The principals of Prime were all experienced, well-respected industry professionals who understood clearly that once they were able to reach the appropriate scale and desired ROI they would be acquired," says Gentile.
Prime has always been funded by venture capitalists, who will want to see a return on their investment within five to seven years. Although Staples was the only bidder, according to industry sources, it would have been able to pay the return the investors were looking for.
The alternative, a phase of continued acquisitions, would have been costly and would require valuable resources. And, as David Guernsey of Guernsey Office Products claims, the alternative route of a management buyout "à la Allied" would have been difficult given Prime was solidly profitable.
So to what extent will the US independent dealer be affected by the acquisition? The common view is "not much". Al Lynden, VP of Chuckals, believes the impact on the dealer community will be nothing more than a "passing interest. I don’t believe that Prime was overly dominant in any particular market, like say WB Mason in Boston, so I doubt that a single market should be impacted."

 

Frenzy
Baitler claims that the move does not signal the beginning of a feeding frenzy. "We would never do anything that threatens our growth rates, which [on the contract side] have been the highest in the industry for six years. We will look after our existing core and never do anything to overreach our capability. The Prime acquisition was a matter of right opportunity, right time."
Independent dealers, meanwhile, widely believe that Staples may be on the lookout for more acquisition fodder. "It doesn’t need volume for volume’s sake and its contract division is doing quite well," says Jim Preston, CEO of BPGI. "The acquisitions are therefore ones of building critical mass in target markets."
But the industry claims that an onslaught of a dealer rollup seems unlikely. "I do not believe that there will be a buying binge of small dealers. You never keep a lot of small accounts because of the one-on-one service that a small independent can give," says Allied’s Brown.
Lynden adds: "If it fits the business plan and makes good business sense, I think Staples will entertain the idea of buying out other dealers. That’s just good business practice. Do I think that there will be a feeding frenzy like we saw in the USOP days? I highly doubt it."
Binder agrees that the industry is not seeing the onset of a dealer rollup, but claims there definitely seemed to be a greater willingness to buy sales in the mid-market with cheap money over the last year. "I can’t help but wonder if we are about to go through another stage of consolidation in this industry. The independents have hung in pretty well, but the increased pressure from the big four, particularly in the last year, is probably making the environment more difficult."
As the small dealers struggle to keep up with rising operational expenses and the industry becomes increasingly commoditised and competitive, forcing down the value of companies, many are trying to sell their companies. Bob Bergdoll, CEO of Royal Office Products, believes that the acquisition of a small rollup such as Prime could well trigger opportunities for other rollups to form. He thinks the Prime purchase could well push other OP resellers such as Office Depot and OfficeMax to revalue their acquisition strategies.
Walper adds: "I feel strongly that Staples would move to solidify its position in markets where it has less commercial presence and I think this will force a defensive move or counter-attack by Office Depot. Independents in strategic niche markets may well be acquisition targets already. "
Gentile adds: "If the balance sheets of the other big box retailers improve, resulting in their ability and appetite to also enter the acquisition arena, then we will see independent dealer market share erode faster than it has recently. This hurts the wholesalers as well as the manufacturers."