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Starboard Discloses Stake in Office Depot (ODP)

Activist hedge fund Starboard Value LP, today, disclosed that it has taken a 13.3% ownership stake in Office Depot Inc. (NYSE: ODP). Starboard is now ODP’s largest shareholder.

The fund also sent a letter to Office Depot’s Chairman and CEO, Neil Austrian and the Board of Directors. The fund noted in the letter that the company is deeply undervalued and a significant opportunity exists to improve the company’s performance and valuation based on actions that are within the control of ODP’s management team and Board. The letter was made public earlier today.

Starboard outlined several ways in the letter in which ODP can significantly improve its operating performance and substantially increase EBITDA. The fund noted that ODP can meaningfully reduce its general and administrative expenses to historical G&A expense-to-sales and G&A expense per store ratios.

Starboard also said significantly reducing advertising expenses will boost EBITDA. The fund noted that the company’s advertising expenses are substantially higher than peer levels and do not appear to be generating an adequate return on advertising dollars invested.

Starboard has also recommended the company to increase the mix of higher-margin services in its North American Retail Division and increase private label direct sourced penetration of stock-keeping units. The fund said downsizing to smaller store formats will significantly boost operating margins.

The fund estimates that Office Depot de Mexico, which is a non-core and highly profitable joint venture between ODP and Grupo Gigante, could be worth over 50% of ODP’s enterprise value. Office Depot de Mexico is not consolidated in ODP’s financial statements currently.

Starboard also urged the management at ODP to act with renewed sense of urgency and a discipline to lower expenses and execute on strategic initiatives. The fund expressed hopes of having a constructive dialogue with the Board and senior management to address the challenges faced by ODP.

ODP shares have surged in pre-market trading today. At last check, ODP shares were trading 10.53% higher at $2.47.


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