With shares of Office Depot (NYSE:ODP) trading at around $5.16, is ODP an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:
C = Catalyst for the Stock’s Movement
Before we get to what Office Depot looks like without a merger, let’s first take a look at the merger story, which is why the stock is up over 12 percent today.
There could be a merger between Office Depot and OfficeMax Incorporated (NYSE:OMX) as early as this week. The purpose of this merger would be to form a company that could compete better with Staples (NASDAQ:SPLS). While that’s the gist of the story, it seems as though some reporters might be forgetting about an even bigger threat, which goes by the name of Amazon.com (NASDAQ:AMZN). And you have to throw Wal-Mart Stores Inc. (NYSE:WMT) and Target Corp. (NYSE:TGT) into the mix as well. This list can go on for a while due to the popularity of big box retailers. In an ironic way, all this competition could be a blessing at the moment.
These names are being mentioned because they have the potential to take market share away from office-supply chain stores. That being the case, if this deal is for real, then it should pass through the Federal Trade Commission. Throughout the day, it has consistently been stated that a merger would bring the number of office-supply chain stores from three to two, but that’s looking through a microscope. There is a lot more competition out there. And there is definitely more competition than there was in 1997, which is when the Federal Trade Commission blocked Staples from acquiring Office Depot. Another important point is that none of these office-supply chain stores have been setting the world on fire (that’s being very kind) over the past three years. A merger would have the potential to help all parties, including Staples.
If the deal goes through, Office Depot and OfficeMax will enjoy approximately $580 million in cost savings since 50 percent of their store territories overlap. This merger would lead to a company with $18 billion in revenue, but that’s still well short of Staples, which had $25 billion in revenue last year.
Starboard Value LP also plays a role here. Starboard is the largest Office Depot shareholder. Starboard would have to go over all the details and approve the deal.
It’s impossible to predict the odds of this merger taking place. If it does take place, then there is potential for better times ahead for shareholders of all three office-supply chain stores. If the deal doesn’t go through, then we should at least look at what Office Depot looks like if it remains on its own.
Let’s take a look at some numbers prior to forming an opinion on the stock.