By David Benoit
Starboard Value LP has taken control of about 6% of Staples
Inc.'s shares and boosted its position in Office Depot Inc. to
about 10%, moves that could raise pressure for a combination of the
office-supply retailers.
Staples has a market capitalization of $9.2 billion, valuing the
activist investor's stake in the Framingham, Mass., company at
about $550 million. Starboard previously had an about 8.6% stake in
Office Depot, which is based in Boca Raton, Fla., and has a market
value of about $3.5 billion.
In Thursday's filings disclosing the stakes, Starboard didn't
spell out any changes it might seek. But the industry has long been
under pressure to consolidate to better compete with rivals such as
Amazon.com Inc., Wal-Mart Stores Inc. and Target Corp. that offer
broad selections of products including office supplies at
discounted prices.
To be sure, any combination could draw scrutiny from antitrust
regulators because Office Depot and Staples are the last remaining
major retailers specializing in office supplies.
Staples shares surged 11% premarket, while Office Depot rose
nearly 8%. Staples shares are down about 7% on the year, while
Office Depot's are up 27%.
Starboard's position in Staples includes about 1% in swaps
contracts.
In 1997, the Federal Trade Commission won a court ruling
blocking an attempt by Staples to combine with Office Depot. But in
November 2013, in a sign of how new competitors had altered the
industry's landscape, the FTC let Office Depot merge with OfficeMax
Inc. without forcing them to shed any stores.
Amid the fierce competition, Staples' sales have fallen this
year, and the company has been closing stores as it looks to cut
costs. It has also moved to expand its offerings and push
aggressively into online retailing.
Office Depot's results in the third quarter, disclosed last
month, topped Wall Street expectations and it increased its
forecast for the year. The company also has been shutting stores
and reducing costs as it integrates OfficeMax.
A report from Credit Suisse analysts in September said the
chains still have a combined 3,000 locations, twice as many as the
analysts considered warranted. The report, which suggested a deal
between Staples and Office Depot could lead to more than $1.4
billion in annual cost savings by 2017-- equal to the bank's
estimate for the combined company's profits that year--sent both
stocks climbing sharply, in a signal that investors believe in and
applaud the possibility. Staples shares gained 8% the day of the
report, and Office Depot rose 6%.
The Credit Suisse analysts said they believe regulators would
consider a broader set of competitors than just the office-supply
stores in reviewing such a proposed merger, pointing to the FTC's
approval of the Office Depot-OfficeMax deal.
In its November 2013 report on the Office Depot-OfficeMax
merger, the FTC said the "current competitive dynamics are very
different" from those in place when it blocked Staples and Office
Depot from combining 16 years earlier. The regulator said consumers
are less likely to turn to an office-supply store than another
retailer selling a wider variety of wares. It specifically pointed
to the impact of Amazon's emergence on the industry.
Starboard isn't a stranger to the office-supply world and those
dynamics. Last year the New York hedge fund fought for board
representation at Office Depot.
Starboard disclosed its position in Office Depot in September
2012 and began pushing for cost cuts and the sale of the company's
stake in a Mexican joint-venture.
In early 2013, Office Depot struck a deal with OfficeMax, billed
as a merger of equals that would help the combined company compete
better with Staples.
In a rare move for an activist, Starboard continued its proxy
fight for board seats even as it supported the deal. The fund said
its arguments would still be relevant at the combined company,
whose leadership was still an open question.
The sides eventually settled the proxy fight, with Starboard
getting three of 11 board seats. One of them was taken by the
fund's founder and chief executive, Jeffrey Smith, who also served
on the combined company's board until he resigned in September.
Starboard has been busy lately. It is currently pushing for a
deal between tech-industry veterans Yahoo Inc. and AOL Inc.,
another set of competitors it owns shares in and that it believes
could compete better together.
This year it also won attention for its campaign against Darden
Restaurants Inc., the owner of Olive Garden and otherchains, in
which it spent months fighting with the company over issues
including its pasta-making decisions. In September, shareholders
voted out all 12 Darden directors, replacing them with a board led
by Mr. Smith.
Write to David Benoit at david.benoit@wsj.com
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