A Buyout of OfficeMax (OMX) Might Just Be "Takin' Care of Business"
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Shares of OfficeMax, Inc. (NYSE: OMX) are trading higher today as J.P. Morgan made some comments about a possible takeover of the company. JPM thinks that there is potential 100% upside to $28 per share (OMX closed at $14.35 yesterday).
JPM notes that OMX is trading for an enterprise value/EBITDA of 4.3x for 2010, which is the lowest in JPM's coverage universe, and below the group average of 7.2x. The outlook is depressed as well, with 2010 sales forecasts 21% below 2007 levels, and EBIT views off 60% from 2007. Based on a mid-single-digit revenue growth in its five-year plan, OMX expects to hit a peak EBIT level of 3.8%, which would allow EBITDA to leap from $180 million in 2009 to $450 million.
JPM also notes that a key selling point may be the ability to restructure the business. There are questions to the underlying assets, but a gap exists between OMX and peers Staples (Nasdaq: SPLS) and Office Depot (NSE: ODP) in store productivity. OMX is 30% below Staples and 13% below Office Depot.
Another interesting point would be their real estate situation. OMX is going to have 60% of their leases expiring through 2014, giving it, as JPM says, ample opportunity to right-size average store size, relocate to higher-traffic locations, and/or close a mess of stores.
Three exit strategies appear for the company: a potential public offering and/or a full or partial sale to either SPLS or ODP. JPM notes that there has always been an appetite for consolidation in the sector.
Although the Board may not consider it, JPM suggests that a 20% - 25% premium over the current market value may provide for a potential IRR of 70% to 90%. An IRR of 20% - 25% would equate to a $28 per share buyout offer, according to the following: "If they use the “rule of thumb” private equity return threshold of 20-25%, under the assumption of a sales acceleration from flat in 2010 to a 3% average growth from 2011-2015 with a 20% average incremental margin."
JPM notes that synergies between ODP/SPLS and OMX are compelling, as domestic supply chains could be eliminated, along with a potential to reduce overhead by 1% - 2% and buying synergies of up to 1%.
Finally, JPM notes that the challenges of the recession, uncertainty on the employment outlook, the retirement of Sam Duncan in February 2011, and the right price could be a powerful combination for either a financial or strategic transaction.
Shares of OMX are 6.8% higher today on the call, though they've been as high as 8.4%.
JPM notes that OMX is trading for an enterprise value/EBITDA of 4.3x for 2010, which is the lowest in JPM's coverage universe, and below the group average of 7.2x. The outlook is depressed as well, with 2010 sales forecasts 21% below 2007 levels, and EBIT views off 60% from 2007. Based on a mid-single-digit revenue growth in its five-year plan, OMX expects to hit a peak EBIT level of 3.8%, which would allow EBITDA to leap from $180 million in 2009 to $450 million.
JPM also notes that a key selling point may be the ability to restructure the business. There are questions to the underlying assets, but a gap exists between OMX and peers Staples (Nasdaq: SPLS) and Office Depot (NSE: ODP) in store productivity. OMX is 30% below Staples and 13% below Office Depot.
Another interesting point would be their real estate situation. OMX is going to have 60% of their leases expiring through 2014, giving it, as JPM says, ample opportunity to right-size average store size, relocate to higher-traffic locations, and/or close a mess of stores.
Three exit strategies appear for the company: a potential public offering and/or a full or partial sale to either SPLS or ODP. JPM notes that there has always been an appetite for consolidation in the sector.
Although the Board may not consider it, JPM suggests that a 20% - 25% premium over the current market value may provide for a potential IRR of 70% to 90%. An IRR of 20% - 25% would equate to a $28 per share buyout offer, according to the following: "If they use the “rule of thumb” private equity return threshold of 20-25%, under the assumption of a sales acceleration from flat in 2010 to a 3% average growth from 2011-2015 with a 20% average incremental margin."
JPM notes that synergies between ODP/SPLS and OMX are compelling, as domestic supply chains could be eliminated, along with a potential to reduce overhead by 1% - 2% and buying synergies of up to 1%.
Finally, JPM notes that the challenges of the recession, uncertainty on the employment outlook, the retirement of Sam Duncan in February 2011, and the right price could be a powerful combination for either a financial or strategic transaction.
Shares of OMX are 6.8% higher today on the call, though they've been as high as 8.4%.
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