Office Depot Jumps After Starboard Takes 13% Stake

Office Depot Jumps as Starboard Becomes Largest Shareholder
A customer walks out of an Office Depot Inc. store in San Francisco. Photographer: David Paul Morris/Bloomberg

Office Depot Inc., the second-largest U.S. office-supplies chain, rose after activist investor Starboard Value LP became its largest shareholder and started pushing for changes to improve earnings.

The shares jumped 5.3 percent to $2.60 at the close in New York. The Boca Raton, Florida-based retailer has gained 21 percent this year.

Starboard Chief Executive Officer Jeffrey Smith wrote in a letter to Office Depot CEO Neil Austrian today that the retailer’s “poor operating performance” has hurt the shares. Starboard, which now owns 13 percent of the chain, said Office Depot should move to smaller stores and reduce the number of items it sells. The chain also should cut general expenses and “significantly” lower advertising costs, Smith said.

The retailer, which has about 1,680 locations worldwide, has posted four straight years of falling sales and a net loss of $57.4 million last quarter. Office Depot, Staples Inc. and OfficeMax Inc. are facing more competition from online retailers such as Inc. while selling fewer traditional supplies as more workers use computers, tablets and smartphones.

“Office Depot is one of the more challenged companies in a troubled sector,” Bradley Thomas, an analyst at KeyBanc Capital Markets Inc. in New York, said in an interview Sept. 12.

Brian Levine, a spokesman for Office Depot, declined to comment in an e-mail.

Store Closings

Austrian moved from board member to interim CEO and chairman after Steve Odland resigned in October 2010. After a search, the company made him the permanent head of the company in May 2011. He has since been trying to cut costs and improve customer service. The company will announce a plan next month that may include shrinking or closing stores as it has 500 leases up for renewal in the next three years, Kevin Peters, North American retail president, said earlier this month.

Starboard was founded in March 2011 in a spinoff from Cowen Group Inc.’s Ramius LLC and has more than $1 billion under management. The New York-based firm recently lost its fight to install three new directors at AOL Inc. after saying the company was spending too much money on failed efforts.

Today’s increase in Office Depot’s stock came after two gains of more than 19 percent in the past nine trading days. On Sept. 5, the chain repeated its forecast for earnings before interest and taxes of as much as $135 million. Starboard also met with Austrian on Sept. 5, according to the letter. The stock rose 19 percent that day and climbed 21 percent on Sept. 12.

Merger Speculation

On Sept. 5, Austrian said at an investor conference hosted by Goldman Sachs Group Inc. that there are too many office-supply stores and it’s “pretty clear today that there’s going to have to be consolidation at some point.”

There has been speculation that there will be a merger in the industry since the Federal Trade Commission blocked Staples’ acquisition of Office Depot in 1997 on anti-competitive grounds, Thomas said. The endgame for Office Depot should be some kind of joining with OfficeMax, he said. OfficeMax is the third-largest office-supplies chain after Staples and Office Depot.

A merger of Office Depot and OfficeMax would be “natural,” Staples Chairman and CEO Ronald Sargent said last year at a conference. The FTC is more likely to allow such a combination than if Framingham, Massachusetts-based Staples were to buy either company, he said.

“The landscape has changed dramatically since 1997, when the FTC blocked the Staples/Office Depot merger,” Office Depot said in a statement last year. “However, government approval is certainly not a given.”

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