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Activist Investment Fund Takes a 13.3% stake in Office Depot
Activist investment fund Starboard Value LP said Monday it has taken a 13.3% stake in Office Depot Inc. and argued the office-products supplier can improve profitability by implementing a host of suggestions laid out by the fund.
In a letter to Office Depot’s chief executive, Neil Austrian, that was made public Monday, Starboard CEO Jeffrey Smith said Office Depot’s shares are "deeply undervalued" but that management could take certain actions such as cutting expenses to improve performance. The stake makes Starboard the largest shareholder in Office Depot.
Boca Raton, Fla.-based Office Depot sells a broad array of merchandise, from staplers and printer ink to chairs and copy machines, through a network of more than 1,200 retail stores in the U.S. and Canada. A majority of its stores are in California, Texas and Florida. Office Depot also sells office supplies directly to businesses, and has an international unit that operates through joint ventures, licensing agreements and Internet sales.
Office Depot and its competitor OfficeMax Inc. OMX -0.75% have struggled in recent years with declining sales, hurt by cutbacks in spending as business customers buy less paper, ink and office supplies, the U.S. unemployment rate remains stubbornly high and newer Web-based entrants eat away at market share.
Office Depot has a market capitalization of roughly $704 million. In 2005, the company had a market value of $10.5 billion.
Mr. Austrian, a longtime board member who stepped into the CEO role in May 2011, has been trying to turn Office Depot around by changing the retail-store experience, including downsizing and remodeling U.S. stores. In August, the company posted lower-than-expected sales and a net loss for the second quarter as the North American market remained weak.
Starboard acknowledged in the letter to Mr. Austrian that the industry was under pressure, but said that Office Depot’s performance lagged behind that of peers OfficeMax and Staples Inc., SPLS -0.29% even though the three companies are structured similarly. Although Office Depot has undertaken some cost cuts and made efforts to improve the format of its stores, Starboard called for reining in expenses, including advertising costs, to boost profitability.
The fund said in the letter that even though Office Depot has shut stores in recent years and revenue has fallen, expenses have increased. According to Starboard, bringing costs down could improve Office Depot’s profitability by between $166 million and $379 million.
Starboard also suggested Office Depot could increase sales by pushing higher-margin products and services, including printing and technology services, at its retail locations. The fund also identified opportunities to improve margins at Office Depot’s direct-to-business segment.
An Office Depot spokesman declined to comment.
Wall Street analysts have called for industry consolidation, arguing that a merger of Office Depot and OfficeMax would help the combined company cut costs and better compete with large rivals such as Staples, as well as retailers such as Wal-Mart Stores Inc. WMT +0.42%
While the activist fund stopped short of calling for a sale or merger, it did earmark Office Depot de Mexico, a 50-50 joint venture with Grupo Gigante SAB de C.V., as a "non-core" asset that investors aren’t attributing the right value.
New York-based Starboard, which was spun off from Ramius LLC in 2011, targets small-cap companies it considers undervalued. Several months ago, it mounted a campaign against onetime Internet behemoth AOL Inc., AOL -0.81% pushing for changes in strategy. Although Starboard eventually lost the proxy fight against AOL, the fund made money on its investment, a person familiar with the matter said.
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