Shareholder power: Corporate Express decision is key to future of office products sector

FRAMINGHAM, MASS. —June is shaping up as a pivotal month for the office products sector and it will be a decision made by the shareholders of Corporate Express that stands to reshape the industry.

Later this month, they will vote on whether to accept the immediate benefit of an all-cash buyout offer from Staples, or pursue the delayed gratification of their own acquisition strategy. Staples launched an unsolicited offer of 18 per share for the outstanding shares of Corporate Express on May 19 and set June 27 as the offer deadline. The Corporate Express board, which contends Staples’ bid undervalues the company, announced a deal of its own and said it had reached an agreement to acquire Lyreco, a leading European office products reseller based in France. That deal also will be voted on in late June, although the date of a special shareholders meeting had not been determined at press time.

At issue for Corporate Express shareholders is whether a bird in the hand is worth two in the bush. The combination of Staples and Corporate Express would create a global powerhouse with annual sales of approximately $28 billion, more than 2,000 stores worldwide and a dominant presence in the delivered products segments of the North American and European markets. Staples in the past has shown an ability to successfully integrate acquisitions and its offer price of 18 per share represents a near 90% premium above the Corporate Express closing share price of 14.32 on Feb. 4, the day before rumors of the deal caused the share price to increase.

Conversely, the combination of Corporate Express would create a near $12 billion company focused exclusively on the delivered products segment of the office products industry with a dominant position in North America, Europe and the Asia Pacific region.

However, the long-term potential of the two firms is offset by the near-term risk associated with a three-year transformation plan currently under way that is being executed by ceo Peter Ventress, who assumed that role last fall. In addition, there is the risk associated with integrating the operations and culture of a publicly-held company based in Amsterdam with a privately-held company based in France. “This is the most logical and compelling merger one could envision in our industry,” said Corporate Express ceo Peter Ventress.

Staples chairman and ceo Ron Sargent obviously doesn’t see it that way. He has argued that Staples’ offer delivers to Corporate Express shareholders certain, immediate and superior value and it does so without the substantial execution and other risks inherent in Corporate Express’ long-term plans, with or without the addition of Lyreco.

Staples’ interest in Corporate Express stems from a desire to more rapidly grow its North American delivery and international businesses. By acquiring Corporate Express, Staples could accelerate growth and more broadly diversify its business away from retail operations. Last year the retailer generated about 52% of its sales of $19.4 billion from its 1,738 stores located in the United States and Canada.

The company’s North America retail division is highly profitable and last year produced operating profits of $950 million for an enviable operating margin of 9.5%. However, the delivered products business was even more profitable and generated an operating margin of nearly 11% on sales of $6.6 billion that represented 34% of total company sales. Staples’ international division is its smallest and least profitable, with sales last year of $2.7 billion and operating profits of $98 million for an operating margin rate of 3.6%.

With the addition of Corporate Express, Staples could quickly gain market share in the U.S. market and bolster its international presence as Corporate Express generates 53% of its sales in North America and 23% in Europe. The problem with that scenario is the Corporate Express board has no desire to be acquired by Staples, even after Staples increased its initial offer price of 17.25 per share to 18 per share. According to Corporate Express ceo Peter Ventress, the price offered ignores the ongoing operating value of the company and the positive effects of a new strategic plan implemented last fall that led to an improved performance in the first quarter.

“The offer denies our shareholders any share in the synergies that a combination with Staples would yield,” said Ventress. “These synergies would be significant. At the price level currently indicated by Staples, all synergies would be for the benefit of the Staples shareholders and none for the benefit of our shareholders.”

Staples’ desire to acquire Corporate Express is understandable, but even if the company doesn’t prevail, other acquisitions are a possibility. The company has a cash reserve of $1.2 billion on its balance sheet and a credit profile that enabled it to secure a $3 billion financing deal to buy Corporate Express.