Office Depot looking where we are ‘going to win long term’

Stock falls 18% despite deal for CompuCom

investors are skeptical that a technology makeover can help the chain rebound from a punishing retail slump.

Shares of the retailer suffered their worst decline in two months after Office Depot delivered a grim forecast and announced plans to buy CompuCom Systems for about US$1 billion, giving it a platform to sell tech services to business customers.

The company described the acquisition as the first step toward becoming a seller of business services and technology — rather than a traditional retailer of paper, pens and staplers, which are less in demand as offices go digital. It plans to put tech kiosks run by CompuCom in all of its 1,400 stores while also selling traditional office supplies to the service providers’ current customers.

“It’s going to be a big revolution in the retail space,” said chief executive Gerry Smith, who joined the company in February from personal-computer giant Lenovo Group Ltd. “It’s a lot better alternative than us not doing anything. It’s an extremely important pivot.”

But the plan wasn’t enough to reassure investors, who see a glum retail landscape continuing to cloud Office Depot’s future. The shares fell as much as 20 per cent to US$3.66 on Wednesday, the worst intraday decline since Aug. 9. They had been up 1.5 per cent this year through Tuesday’s close.

Smith said the decline in the stock shows the company still needs to prove to shareholders that this is the right strategy. One of his goals for this deal is to get the company valued by Wall Street as more of a services provider than a retailer, which investors have soured on.

“We’re not looking quarter to quarter — we’re looking where are we going to win long term,” Smith said. “We’re very optimistic we’re going to change the value of the company with this acquisition.”

Office Depot’s sales growth has stalled, and the latest quarter hasn’t brought reason for optimism. The recent hurricanes and a slow back-to-school period both weighed on results, the company said on Tuesday. Samestore sales will decline five per cent to six per cent in the third quarter. Operating income will be US$125 million to US$135 million in the period.

Office Depot is acquiring CompuCom from private equity investor Thomas H. Lee Partners in a deal that includes repaying the takeover target’s debt and issuing new shares. When the transaction is completed, Thomas H. Lee will hold an eight-percent stake in Office Depot.

CompuCom employs about 6,000 licensed technicians — the largest workforce of its kind in North America, Office Depot said. They provide software and hardware help to more than 5.1 million users at business clients.

Office Depot has been seeking a turnaround since a proposed takeover by Staples fell apart last year. After the deal was blocked by U.S. regulators, the company sold off foreign units and shuttered stores. Though the moves have helped the retailer stay profitable, online competition and a broader retail slump have battered margins.

Staples, meanwhile, agreed to be acquired by private equity firm Sycamore Partners in June for about US$6.9 billion.

Office Depot expects the CompuCom deal to start adding to profits in its first year. The firm, based in Boca Raton, Fla., plans to finance the takeover with new debt and the issuance of about 45 million shares of its common stock.

The deal is expected to add about US$1.1 billion in revenue and bring cost savings of US$40 million within two years. The company also plans to gain synergy by selling CompuCom services to Office Depot customers.

Goldman Sachs was Office Depot’s financial adviser in the transaction, with Wachtell, Lipton, Rosen & Katz serving as legal counsel. Weil Gotshal & Manges provided legal advice to CompuCom, which was founded in 1987.