Shares of office-products retailers Staples (SPLS) and Office Depot (ODP) rose to multi-month and multi-year highs, respectively, Thursday after regulatory filings showed hedge fund Starboard Value took a fresh take in Staples while increasing its position in Office Depot, leading to speculation the activist investor may push for a merger of the rivals.
Shares pulled off session highs as a note from Citi analysts raised some doubt that such a tie-up was obvious. Near midday, SPLS was up more than 8% and earlier hit a session high of $16.32, its best level since August 2013. ODP, meanwhile, was up 13% in recent trading and earlier traded as high as $7.74, its highest level since April 2010.
Both filings with the Securities and Exchange Commission, made public Thursday morning, were made on SEC form 13-D, which indicates Starboard’s plans to remain an active, rather than a passive, investor in the companies.
In Staples, the filings showed Starboard Value acquired about 32.4 million shares, or 5.1% of the company, through various funds. In Office Deport, the hedge fund now has a collective stake of some 53.3 million shares, or about 9.9%. As of a Sept. 10 filing, its stake had been 46.3 million shares, or 8.6%.
“This action leads us to believe they will attempt to consummate a merger,” analysts at Janney Capital Markets told clients in a Thursday note. The analysts added: “Ironically, we believe both companies are willing to support a merger, but remain afraid of the FTC,” noting there are many reasons a deal would not past Federal Trade Commission muster.
The firm added: “The financial logic of the transaction at first blush makes sense, but we need to scrub our model deeper at this point. The early integration success at ODP gives a glimpse at the even more substantial cost savings available if these two companies merged.” But a Citi analyst had a different take.
Analyst Kate McShane views a deal as “unlikely” given a likely higher level of scrutiny around anti-competitive behavior so soon after the ODP/OMX merger.
McShane said while a tie-up makes sense she sees significant push back from the FTC given there would be only one major national B2B OS seller. “In our view, the commercial side that services larger regional businesses, Fortune 1000 companies and government/nonprofits is less susceptible to the growing competitive threats that are on the retail side and would make things tougher for customers and vendors.”
She said both could be leveraged buyout candidates, but that scenario was not a sure thing, either.