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Starboard Value Takes Roughly 6% Stake in Staples

Investor Also Boosts Stake in Office Depot, Moves That Could Increase Pressure for Combination

Starboard Value has built a roughly 6% stake in Staples and increased its position in Office Depot. ENLARGE

Starboard Value has built a roughly 6% stake in Staples and increased its position in Office Depot. GETTY IMAGES

Starboard Value LP has built a roughly 6% stake in Staples Inc. and boosted its position in Office Depot Inc. to about 10%, said people familiar with the matter, moves that could raise pressure for a combination of the office-supply retailers.

Staples has a market capitalization of $9.2 billion, valuing the activist investor’s stake in the Framingham, Mass., company at about $550 million. Starboard had an about 8.6% stake in Office Depot, which is based in Boca Raton, Fla., and has a market value of about $3.5 billion.

In its filings disclosing the stakes, Starboard isn’t expected to spell out any changes it might seek. But the industry has long been under pressure to consolidate to better compete with rivals such as Amazon.com Inc., Wal-Mart Stores Inc. and Target Corp. that offer broad selections of products including office supplies at discounted prices.

Starboard led a fight last year to get on the board of Office Depot, where its co-founder and chief executive, Jeffrey Smith, shown at a conference in Las Vegas in May, sat until he resigned in September. ENLARGE

Starboard led a fight last year to get on the board of Office Depot, where its co-founder and chief executive, Jeffrey Smith, shown at a conference in Las Vegas in May, sat until he resigned in September. REUTERS

To be sure, any combination could draw scrutiny from antitrust regulators because Office Depot and Staples are the last remaining major retailers specializing in office supplies.

In 1997, the Federal Trade Commission won a court ruling blocking an attempt by Staples to combine with Office Depot. But in November 2013, in a sign of how new competitors had altered the industry’s landscape, the FTC let Office Depot merge with OfficeMax Inc. without forcing them to shed any stores.

Amid the fierce competition, Staples’ sales have fallen this year, and the company has been closing stores as it looks to cut costs. It has also moved to expand its offerings and push aggressively into online retailing.

Office Depot’s results in the third quarter, disclosed last month, topped Wall Street expectations and it increased its forecast for the year. The company also has been shutting stores and reducing costs as it integrates OfficeMax.

A report from Credit Suisse analysts in September said the chains still have a combined 3,000 locations, twice as many as the analysts considered warranted. The report, which suggested a deal between Staples and Office Depot could lead to more than $1.4 billion in annual cost savings by 2017— equal to the bank’s estimate for the combined company’s profits that year—sent both stocks climbing sharply, in a signal that investors believe in and applaud the possibility. Staples shares gained 8% the day of the report, and Office Depot rose 6%.

Staples shares are down about 7% on the year, while Office Depot’s are up 27%.

The Credit Suisse analysts said they believe regulators would consider a broader set of competitors than just the office-supply stores in reviewing such a proposed merger, pointing to the FTC’s approval of the Office Depot-OfficeMax deal.

In its November 2013 report on the Office Depot-OfficeMax merger, the FTC said the “current competitive dynamics are very different” from those in place when it blocked Staples and Office Depot from combining 16 years earlier. The regulator said consumers are less likely to turn to an office-supply store than another retailer selling a wider variety of wares. It specifically pointed to the impact of Amazon’s emergence on the industry.

Starboard isn’t a stranger to the office-supply world and those dynamics. Last year the New York hedge fund fought for board representation at Office Depot.

Starboard disclosed its position in Office Depot in September 2012 and began pushing for cost cuts and the sale of the company’s stake in a Mexican joint-venture.

In early 2013, Office Depot struck a deal with OfficeMax, billed as a merger of equals that would help the combined company compete better with Staples.

In a rare move for an activist, Starboard continued its proxy fight for board seats even as it supported the deal. The fund said its arguments would still be relevant at the combined company, whose leadership was still an open question.

The sides eventually settled the proxy fight, with Starboard getting three of 11 board seats. One of them was taken by the fund’s founder and chief executive, Jeffrey Smith, who also served on the combined company’s board until he resigned in September.

Starboard has been busy lately. It is currently pushing for a deal between tech-industry veterans Yahoo Inc. and AOL Inc., another set of competitors it owns shares in and that it believes could compete better together.

This year it also won attention for its campaign against Darden Restaurants Inc., the owner of Olive Garden and otherchains, in which it spent months fighting with the company over issues including its pasta-making decisions. In September, shareholders voted out all 12 Darden directors, replacing them with a board led by Mr. Smith.