By David Benoit
Starboard Value LP is calling for office-supply chains Staples
Inc. and Office Depot Inc. to merge in a letter it plans to release
Tuesday, the first time the activist has publicly declared itself
in support of a tie-up of the rivals since taking a stake in
Staples last month.
The investor owns a roughly 6% stake in Staples and around 10%
of Office Depot.
In a letter to Staples, reviewed by The Wall Street Journal, the
activist says the cost cuts in a combination could more than double
operating profits and that the two chains could be more efficient
about closing stores when combined.
Starboard's letter says it has met with management of both
companies to urge the deal and says if Staples management doesn't
seriously pursue the transaction it would be "a clear sign that
significant leadership change is needed at Staples."
Representatives from Staples and Office Depot weren't
immediately available for comment Tuesday.
Staples last week announced changes to its board, adding a
Google Inc. executive as a new director and changing lead
independent directors. The company also said it would take a step
toward separating the chairman and chief executive roles, currently
held by Ron Sargent. Mr. Sargent also declined to accept a
raise.
Starboard's letter applauded those moves, though it said the
step to separate the chairman and CEO jobs came long after
shareholders voted for such a change last year. The activist said
those announcements spurred it to release its letter publicly.
At Staples, the deadline to nominate board members or start a
proxy fight is in early March.
Shares of Staples and Office Depot each fell in morning Tuesday.
Overall, Staples is up 17% since Starboard announced its stake in
December, while Office Depot has risen 19%.
Starboard has a history with office-supply stores, after first
investing in Office Depot back in 2012 and fighting for board seats
even as that chain merged with OfficeMax, a deal that closed in
2013.
Combining Staples with Office Depot would essentially condense
the industry from three major players to one in just a few years,
often the kind of consolidation that raises antitrust concerns.
Staples and Office Depot had tried merging only to be blocked by
regulators in a 1997 lawsuit.
But some analysts have pointed to the Federal Trade Commission's
report on Office Depot and OfficeMax combining as evidence
regulators may allow a Staples and Office Depot deal now.
In that ruling, the regulator said much had changed since 1997,
particularly the emergence of Amazon.com Inc. and big retailers
like Wal-Mart Stores Inc. and Target Corp., which all sell office
supplies now.
Starboard has gained attention in recent years as one of the
most active activists, taking on companies ranging from paper
producers to pasta sellers. It scored a significant victory last
year when it unseated the entire board of Darden Restaurants Inc.
and named its own founder Jeffrey Smith as chairman.
The New York hedge fund also has a similar campaign ongoing at
Yahoo Inc. where it is pushing a deal with AOL Inc., again as it
has stakes in both aging Internet companies.
Write to David Benoit at david.benoit@wsj.com
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