Staples, Inc. (SPLS), Office Depot Inc (ODP): Jeff Smith is Bullish on These Companies; Will He Push for a Merger?

Jeff Smith, the manager of Starboard Value is bullish on the Office Supplies segment as Starboard has recently made two bullish moves involving Staples, Inc. (NASDAQ:SPLS) and Office Depot Inc (NASDAQ:ODP). In a filing with the Securities and Exchange Commission, Starboard disclosed ownership of more than 32.36 million shares of Staples, the activist stake representing 5.1% of the company’s common stock. In Office Depot, the investor surged its activist position to 53.36 million shares, equal to 9.9% of the outstanding common stock.

Jeff Smith

As Starboard disclosed its stake in Staples, Inc. (NASDAQ:SPLS), the stock jumped by more than 9% on Thursday. Since the beginning of the year, the stock gained only around 2%, having a volatile year so far, which caused the stock to decline in the first half but over the last six months it has appreciated by 45%. Even though the stake is activist by nature, Mr. Smith has not revealed any plans or proposals that he might discuss with the company’s board of directors or management. However, we might see some more activity soon, as it is the usual strategy of Starboard.

More interesting is the case of Office Depot Inc (NASDAQ:ODP). Starboard raised its stake in a holding, which the fund intended to cut up until a couple of months ago. Last November, Starboard entered into a sale plan agreement with J.P. Morgan Securities LLC to sell up to 11 million shares of Office Depot. However, even though the stock gained more than 43% over the last year, no shares of the company have been sold and in September, Starboard decided to terminate the agreement. In addition, in September Mr. Smith resigned from Office Depot’s board of directors.

Starboard has held shares of Office Depot Inc (NASDAQ:ODP) since September 2012, while the stock surged by more than 390% since then. As the investor revealed its position that initially contained 38 million shares, equal to 13% of the company’s outstanding stock at the time, it also disclosed a letter sent to CEO and board of directors in which Mr. Smith outlined why Office Depot is undervalued and what can be done in order to increase the shareholder value of the company.

The market reacted positively on Starboard raising its position in Office Depot Inc (NASDAQ:ODP) as well, with the stock gaining more than 14% in intraday trading. The appreciation comes on the back of a possibility of a merger between two companies that Mr. Smith might intend to promote, since office supplies business is in need for a consolidation, especially with big retailers such as, Inc. (NASDAQ:AMZN), or Wal-Mart Stores, Inc. (NYSE:WMT) are also offering office supplies but benefit from more customers since they offer a more diverisified range of products.

In fact, analysts from Credit Suisse, a couple of months ago, discussed the idea of a merger between Office Depot and Staples, Inc. (NASDAQ:SPLS). However, such a deal might face some criticism from antitrust regulators, since both companies represent some of the biggest players in the segment. It might even be the case that in the even of a merger, the combined company might be forced to cut the number of stores. By the way, Office Depot Inc (NASDAQ:ODP) and Staples tried to combine back in 1997, but the $4 billion deal was temporarily blocked by a Federal Judge and fell through soon after that.

During the third quarter, the number of funds holding shares of Office Depot Inc (NASDAQ:ODP), among investors that we track, dropped to 34 from 35 in the previous quarter, while the aggregate value of their stakes declined by $52.65 million to $528.33 million. At the same time, 31 funds disclosed holding shares of Staples, Inc. (NASDAQ:SPLS), down by four funds over the quarter, but the aggregate value of shares held by these funds went up by $104.62 million to $828.30 million. One of the largest investors in Staples, Inc. (NASDAQ:SPLS), aside from Starboard, is Richard S. Pzena’s Pzena Investment Management, which holds 33.31 million shares as of the end of September. Office Depot Inc (NASDAQ:ODP) has seen an increase in bullish sentiment from several big players on Wall Street such as Steve Cohen, whose fund Point72 Asset Management raised its stake by 2% during the third quarter to 6.70 million shares and Israel Englander of Millennium Management, which boosted its position to 2.99 million shares, from 32,700 shares.

Disclosure: none