Office Depot's $1 billion buyout of CompuCom, announced yesterday, values the IT services provider at slightly more than 10 times EBITDA, according to sources close to the struggling retail giant. At first glance that's a high multiple, considering most M&A deals involving IT services providers have valuations of roughly 5 to 7 times EBITDA.
It begs the question: Did Office Depot pay too much for CompuCom? Some sources say no because it was a stock-related deal. Also, the post-deal valuation -- when synergies between Office Depot and CompuCom arrive -- is closer to roughly 7 times EBITDA, sources assert.
Office Depot Optimism vs. Shareholder Pessimism
Office Depot and CompuCom predict the deal will create major synergies between the retail giant's physical locations and CompuCom's extensive IT services experts. Also, a portion of CompuCom's business involves recurring revenues -- which Wall Street now craves.
Still, Office Depot issued a financial forecast warning for the rest of 2017 yesterday, basically saying its core business continues to weaken. Office Depot's stock is trading down about 18 percent this morning (Wednesday, October 4, 2017, 10:14 a.m. ET).
The Office Depot-CompuCom deal, independent of Office Depot's current financial forecast warning, is expected to close by the end of 2017.