Staples Gains as Analyst Says It Should Buy Office Depot

Staples Inc. rose for a sixth day after a Credit Suisse analyst said the company should buy Office Depot Inc. to fend off online retailers.

Staples jumped 8.1 percent to $12.63 as of 4:07 p.m. in New York to bring its gain since the start of last week to 15 percent, the most in almost six years, according to data compiled by Bloomberg. Before the recent rally, shares of the Framingham, Massachusetts-based retailer had retreated 58 percent from their level in October 2010 as profit fell amid competition from Web-based rivals such as Amazon.com Inc.

Staples should buy competing office supply retailer Office Depot Inc., Gary Balter, an analyst at Credit Suisse, wrote in a note today, saying the deal would reduce costs by $1.44 billion and more than double combined operating profit by 2017. A merger could be “but one activist investor away,” he wrote.

“Retail is losing share to online and many managements are either wearing blinders or are ignorant to that, and you need someone to wake them up,” Balter said in a phone interview.

Online Competition

Buying Office Depot could boost Staples shares as high as $30 by 2017, Balter said, and result in a company able to compete with online rivals. Balter said Staples would probably have to pay an 80 percent premium on Office Depot shares. That stock gained 8.6 percent to $5.44, the biggest gain in almost three months.

Expansion by Web-based companies such as Amazon.com has spurred reorganizations across the retail industry, including the merger of stationery suppliers Office Depot with OfficeMax Inc. Staples outlined plans in March to shut as many as 225 North American stores through next year, amounting to 12 percent of its outlets in the region, and to reduce costs by as much as $500 million.

On Aug. 20, Staples said it will shut about 140 locations this year after net income in the three months ended Aug. 2 dropped 20 percent to $82 million. The company closed 80 outlets in North America in the fiscal second quarter, and forecast sales in the third quarter will decline.

Starboard Value LP, a hedge fund led by activist investor Jeffrey Smith, has pressured Office Depot to improve operations since taking a stake in the company in 2012. The fund owned 8.6 percent of Office Depot’s outstanding shares as of June 30, according to data compiled by Bloomberg.

“This report is more geared toward Staples. Now’s their chance, why are they waiting?” Balter said. “There are just too many office suppliers, too many retail stores out there that need to be consolidated. Why not close them out now instead of doing the two-step thing?”

(Corrects quote in final paragraph to add dropped word “not”.)
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