A Staples-Office Depot Deal Makes Sense; SPLS or ODP Stock Don’t

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The sleepy world of office supply retailer like Office Depot Inc (ODP) and Staples, Inc. (SPLS) got kind of interesting Thursday, a day after ODP and SPLS were among a handful of stocks that actually closed higher in a down market.

staples spls stockAs it turns out, ODP and SPLS had gains on a bad day for stocks because activist investor Starboard Value LP is at it again. The fund upped its holdings in ODP to about 10% and disclosed that it’s taken a 6% stake in SPLS.

Naturally that has the market — or at least the part of it that still pays attention to office supply retailers — thinking merger. Hey, apart from tying these two bricks together to see if they’ll float, what else could Starboard want?

Presumably SPLS, with a market capitalization of about $9.3 billion, would acquire ODP, worth just $3.7 billion. Sure, there could be some antitrust concerns, but those seem laughable. This industry has been shrinking for at least a decade under an onslaught from Wal-Mart Stores, Inc. (WMT), Amazon.com, Inc. (AMZN) and others. If anything, it hasn’t seen enough consolidation.

After all, there’s probably still room for a national office supply chain, but it won’t be able to compete on price without that combination of high volume and economies of scale that make profitability possible on razor-thin margins.

SPLS and ODP a Trade, Not an Investment

Given that reality, Office Depot and Staples shouldn’t be slugging it out with each other. They need whatever resources they can muster to survive against WMT and AMZN. An ODP tie-up with SPLS is really the next logical step after ODP’s acquisition if OfficeMax.

Heck, even with the industry in retreat, it still has far too many stores, experts reckon. The big office supply chains still have a combined 3,000 locations, according to report by Credit Suisse analysts cited by The Wall Street Journal, yet demand dictates a need for perhaps half that many stores.

But just because a merger is a good idea doesn’t mean investors should try to play it. For one thing, it’s a little too late for that. ODP and SPLS have already soared on the news. That trade is closed.

As for an investment, surely there are better ideas out there then betting on an ODP-SPLS deal that then somehow manages to become a holding that can beat the market over the long haul. SPLS is barely above break-even this year, and that’s only because of the rally sparked by Starboard’s interest. ODP was essentially a do-nothing stock until last month. Presumably Starboard’s activity accounts for much of the recent rally there, too.

Starboard’s newfound interest in Staples is an interesting business news story, but apart from professional traders and arbitrageurs, there’s really not much for the average investor to do.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2014/12/staples-office-depot-spls-odp-stock/.

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