Office Depot (ODP), Staples (SPLS) Merger 'Unlikely', Citi Says

Shares of Staples (NASDAQ: SPLS) and Office Depot (NASDAQ: ODP) are both sharply higher Thursday after activist hedge fund Starboard Value filed separate 13Ds showing a new stake in Staples and a raised stake in Office Depot. Speculation is now centered on a potential combination of the two.

Commenting on a potential merger, Citi analyst Kate McShane views it as "unlikely" given a probably higher level of scrutiny around anti-competitive behavior so soon after the ODP/OMX merger.

McShane said while a tie-up makes sense she sees significant push back from the FTC given there would be only one major national B2B OS seller. "In our view, the commercial side that services larger regional businesses, Fortune 1000 companies and government/nonprofits is less susceptible to the growing competitive threats that are on the retail side and would make things tougher for customers and vendors."

On if either could be potential LBO candidates, the analyst said while possible there are hurdles for both. "For SPLS, our 17% IRR estimate might not be high enough for a financial sponsor to take on the risk, especially if the potential buyer's assumptions for restoring margins is more conservative than our estimate of a return to the levels of a couple years ago; for ODP, an LBO would require a higher than normal amount of equity contribution given the high debt levels that the co. currently carries and the potential to continue to realize synergies through restructuring may be limited if demand for OS falls far below ODP’s expectations."

The firm maintained a Neutral rating on both.

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