By David Benoit
Starboard Value LP has built a roughly 6% stake in Staples Inc.
and increased its position in Office Depot Inc. to about 10%,
according to people familiar with the matter, moves that could
increase pressure for a combination of the office-supply
retailers.
Staples has a market capitalization of $9.2 billion, meaning
Starboard's stake in the Framingham, Mass., company is worth about
$550 million.
The activist investor had a roughly 8.6% stake in Office Depot,
which is based in Boca Raton, Fla., and has a market value of about
$3.5 billion.
Starboard won't spell out any specific changes it will push for
in filings--expected Thursday--with the Securities and Exchange
Commission disclosing the stakes, the people familiar with the
matter said.
But the industry has long been under pressure from shareholders
and analysts to consolidate to compete better against a growing
array of competitors such as Amazon.com Inc., Wal-Mart Stores Inc.
and Target Corp. that offer consumers broad selections of products,
including office supplies, at discounted prices.
Any combination could draw scrutiny from antitrust regulators as
Office Depot and Staples are the last remaining major retail chains
specializing in selling pens, binders, printers and the like.
In 1997, the Federal Trade Commission won a court ruling
blocking an attempt by Staples to combine with Office Depot. But in
a sign of how new competition has altered the industry, in November
of last year the FTC allowed Office Depot to 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 out
costs. It has also moved to expand its offerings and push
aggressively into online retailing. Office Depot has also been
shutting stores and cutting costs as it works through the
integration with 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 said were 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
entire profits that year--sent both stocks up sharply, in a signal
investors believe in and applaud the possibility. Staples gained 8%
the day of the report, and Office Depot rose 6%.
Staples shares are still down some 7% for the year, while Office
Depot's are up 27% in the wake of the OfficeMax deal.
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 report last November, the FTC said the "current
competitive dynamics are very different" from those in place when
it had blocked Staples and Office Depot from getting together 16
years earlier. The regulator said consumers were 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 is no stranger to the office-supply world and those
dynamics. The New York hedge fund led a fight last year to get on
the board of Office Depot, where its co-founder and chief
executive, Jeffrey Smith, sat until he resigned in September.
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 the 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 the board seat even as it
supported the deal. The firm said its arguments would still be
relevant at the combined company, and who would lead it was still
an open question.
The sides eventually settled the proxy fight, with Starboard
getting three board seats out of 11.
The deal closed in November 2013 and Office Depot's results in
the third quarter, disclosed last month, topped Wall Street
expectations. The company also increased its guidance for the
year.
Starboard has been busy recently. 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.
The activist this year also drew attention for its campaign
against Darden Restaurants Inc., the owner of Olive Garden and
other chains, in which it spent months fighting over issues
including its pasta-making decisions. In September, shareholders
voted out all 12 directors at Darden, replacing them with a board
led by Mr. Smith.
Write to David Benoit at david.benoit@wsj.com
Access Investor Kit for AOL, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US00184X1054
Access Investor Kit for Amazon.com, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US0231351067
Access Investor Kit for Darden Restaurants, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US2371941053
Access Investor Kit for Office Depot, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US6762201068
Access Investor Kit for Staples, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US8550301027
Access Investor Kit for Target Corp.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US87612E1064
Access Investor Kit for Wal-Mart Stores, Inc.
Visit
http://www.companyspotlight.com/partner?cp_code=P479&isin=US9311421039
Subscribe to WSJ: http://online.wsj.com?mod=djnwires