-AREX Capital urges Office Depot owner ODP to split off units (updated)
18/12/2023 19:47
(Updates with share price in paragraph 5, comment from investor
Greenlight Capital in paragraph 12)
By Svea Herbst-Bayliss
NEW YORK, Dec 18 (Reuters) - AREX Capital is urging
office supply company ODP Corp. ODP.O to separate its brick
and mortar retail unit and sell its procurement platform Varis,
arguing that splitting apart the company's businesses would
boost its share price by at least 50%.
The hedge fund, which owns roughly 1% of ODP, praised the
company's ODP Business Solutions group which sells everything
from printer paper to janitorial supplies to businesses and its
Veyer service delivery unit for delivering steady growth.
Its retail office supply unit, which operates Office Depot
and OfficeMax, and the Varis division, however, are hurting
prospects for the company currently valued at $2 billion, AREX
wrote to the board. Reuters first reported on the push for
changes before the letter to the board was made public.
"Structural changes are necessary for ODP's share price and
valuation to have a chance to approximate the fair value of its
underlying assets," wrote Andrew Rechtschaffen, AREX's managing
partner, and James Corcoran, a partner.
The share price could rise by 60% to $80 a share over the
next one to two years, according to AREX's calculations. It rose
2.77% on Monday to trade at $52.63.
The hedge fund is ratcheting up pressure now to push ODP to
move more quickly and find alternatives one year after
management and the board rejected interest from rival bidders,
including Staples, and announced plans to stay independent and
retain its current business mix.
AREX also hinted it might pursue a board challenge next year
if the status quo is maintained.
ODP did not respond to a request for comment.
AREX suggested ODP sell a piece or all of Varis.
"A full sale of Varis would provide ODP with additional
capital for share repurchases, further focus the enterprise, and
vastly improve the ODP investment story," the letter said.
Results at Varis, including this year's expected revenue of
around $10 million, are "unambiguously disappointing", the
letter said, noting ODP should use capital to buy back more
shares instead of funneling more cash into Varis.
Other investors supported AREX's efforts. A spokesperson for
David Einhorn's Greenlight Capital said "ODP's near-term capital
allocation priorities should be focused on an accelerated share
buyback and ceasing to squander further shareholder resources on
Varis, which should be partnered, sold or shuttered."
AREX also took aim at ODP's retail business, which it says
causes the entire company to be seen as a "challenged
brick-and-mortar retailer."
"This misperception will likely persist for as long as
Office Depot contributes a meaningful portion of the Company’s
EBITDA (a measure of core profitability)," the letter said.
AREX, which has owned ODP stock for years and has held
discussions with the company, wants management and the board to
act more forcefully to boost returns for shareholders. Should
the pace be too slow, AREX said it may "consider taking
additional steps," signaling a possible future board challenge.
At the same time Rechtschaffen and Corcoran praised ODP,
where CEO Gerry Smith took a medical leave in September, for
"solid execution" and buying back shares.
If the company made some changes to its capital structure it
would have $875 million more available to repurchase shares, a
move that could boost the share price by roughly 90% to nearly
$100 per a share, the hedge fund argued.
(Reporting by Svea Herbst-Bayliss, editing by Deepa Babington
and Josie Kao)
((svea.herbst@thomsonreuters.com; +617 233 2138; Reuters
Messaging: svea.herbst.thomsonreuters.com@reuters.net))