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ODP Turns Down Stapes Buyout Offer, Proposes Alternative Plan

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Staples’ third ambitious attempt to acquire the parent company of Office Depot seems to have hit a roadblock. The ODP Corporation (ODP - Free Report) in a letter to Sycamore Partners — owner of Staples — has turned down the buyout offer citing regulatory hurdles, and instead proposed for another alternative plan. The Boca Raton-based company informed, “there is a more compelling path forward to create value for ODP and its shareholders.”

The rebuff comes a week after Staples proposed to acquire ODP Corporation for $2.1 billion or $40.00 per share in cash. The offer represented a 61% premium to ODP Corporation's average closing price in last 90 trading days. Staples in its letter on Jan 11 had also warned that in case of not reaching an agreement, it may initiate a public, all-cash tender offer for 100% of ODP's outstanding shares of common stock in March 2021.

Let’s Delve Deeper

Markedly, ODP Corporation informed that it is open for a limited deal, which has a better chance to receive regulatory clearances.

Joseph Vassalluzzo — ODP Corporation chairman — in the letter proposed that either Staples could acquire ODP’s retail and consumer-facing e-commerce operations for a price that benefits stockholders or both the companies could set up a joint venture, sharing the risks and benefits equally. Vassalluzzo said, “Though both of these options require regulatory approval, we believe the regulatory risk of pursuing a retail-only transaction to be significantly lower than your proposed transaction."

ODP Corporation highlighted that Staples only intention is to acquire e-commerce and retail businesses, and that requires either to sell or divest its CompuCom IT services business or its U.S. commercial business unit (the "B2B Business").

Joseph Vassalluzzo stated, “A transaction with you that is limited to our retail and consumer-facing and ecommerce business would eliminate the time, complexity and uncertainty created in your proposal by the need to identify a suitable third-party buyer willing to acquire the B2B Business on terms that would be mutually acceptable to our respective companies.” Vassalluzzo added that the company has already commenced the process of value-maximizing sale of the CompuCom, as part of the strategic review of the division announced in November.

Well, Staples seems determined to get the deal done this time. Analysts pointed that the business environment has drastically changed with more and more companies now providing office supplies, and this is sufficient to secure regulatory approvals. However, ODP Corporation pointed that if Staples intends to go ahead with its complete takeover plan, then it should be prepared to address the regulatory issues and bear other risks.

Staples’ earlier push to buy Office Depot (now ODP Corporation) for $6.3 billion faced antitrust scrutiny, and the deal was called off in mid-2016. The Federal Trade Commission had then ruled that the deal would lower competition nationwide and result in price hikes and fewer options for large corporate houses that usually make bulk purchases. The regulatory body had also thwarted a takeover attempt made in 1997.

Wrapping Up

Let’s wait and see how things unfold in the near term. But for the time being, players in the office-supplies space are benefiting from surge in demand for computers, printers, paper and other accessories owing to the recent boom in work from home triggered by the ongoing pandemic. Well, this remote working culture is here to stay for a while, and ODP Corporation through its product and services looks well poised to cater to the evolving demand stemming from such changes.

The company leverages its direct supply chain, robust e-commerce platform and retail facilities to effectively serve customers. Markedly, the company not only provides traditional office supplies but also offers technology services, including device management and security among others. The company’s low-cost model, multiple routes to market, expanded product portfolio, and flexible supply chain and distribution capabilities bode well.

Markedly, shares of this Zacks Rank #3 (Hold) company have surged 97.5% in the past six months, compared with the industry’s rally of 33.5%.

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