Office Depot Parent ODP Sends Thanks After Investor Suggests Retail Spin-Off

AREX Capital Management says that ODP, the parent company of Office Depot and OfficeMax, could see a huge increase in the company’s share value and free up about $875 million to repurchase shares, to which ODP replied, ‘We thank AREX for its input.’

ODP, the parent company of Office Depot and OfficeMax, Tuesday thanked one of its investors, investment firm AREX Capital Management, for its suggestion that ODP make some major structural changes including spinning out its Office Depot business.

However, Boca Raton, Fla.-based ODP did not offer a positive or negative response to AREX’s proposals.

New York-based AREX, in a letter made public on Monday, that ODP spin out its Office Depot business in a tax-free process while courting potential buyers of that business. AREX also proposed that ODP sell or even close its Varis procurement business.

[Related: Office Depot Parent ODP CEO Takes Temporary Leave Of Absence For Medical Procedure]

AREX owns roughly 1 percent of ODP, according to Reuters.

ODP, in its Tuesday response, said in a statement, “We thank AREX for its input, as we welcome all shareholders’ views on the Company and the most effective way for it to realize value for our investors. The Board regularly and actively evaluates the Company’s strategic plan - including its approach to capital allocation and any potential alternatives for its businesses - and will continue to do so, informed by, among other things, the views expressed by AREX or other shareholders.”

ODP, which previously rejected acquisition and break-up proposals, in November 2022 re-organized into four new business units, including:

• ODP Business Solutions, a large and growing B2B distribution business with over $4 billion in annual revenue serving small businesses to enterprises with core business products and adjacent products including janitorial sanitation, cleaning and break room products, and copy and print products and services.
• Office Depot, an omnichannel consumer business with a profitable retail footprint and an e-commerce platform.
• Veyer, which is ODP’s supply chain services and sourcing provider and owner of a large supply chain operation with a capability to serve 98.5 percent of North American ZIP codes with next-day service.
• Varis, a digitally native B2B procurement platform business that ODP has been creating over the past couple of years to help transform the procurement ecosystem for buying organizations and the suppliers that serve them.

AREX, in its letter to ODP, said it has been generally pleased with ODP’s operational results, and was even supportive of ODP’s 2022 sale of its CompuCom IT services business at a loss of over $750 million, noting that the deal “spoke well of the Board’s willingness to admit mistakes and act decisively.”

However, AREX wrote, ODP’s “Board and management do not feel the appropriate sense of urgency to promptly take the necessary steps to maximize shareholder value.” As a result, the investor said, it decided to go public with its perspective on two major issues that impact ODP’s share prices and its “obvious” remedial actions.

The first issue, AREX wrote, is that ODP is still thought of as a brick-and-mortar retailer, as the company’s Office Depot retail business deters investors who might otherwise give the company much higher multiples.

“As a result, Office Depot ends up anchoring the trading value of the overall enterprise. ODP’s multiple should actually be increasing as ODP Business Solutions contributes a growing portion of the Company’s EBITDA and as Veyer rapidly expands its third-party logistics business,” it wrote. “Instead, ODP’s valuation has stubbornly remained below 4x EBITDA, which is unreasonable for a healthy, unlevered company that should be growing its EBITDA over the next several years and enjoys strong free cash flow conversion.”

ODP has already put in place the right structure to spin off its Office Depot business during its earlier consideration of such a move, AREX wrote.

“There is no compelling reason to maintain the existing corporate structure, and the process of executing on a tax-free Office Depot spin-off should begin immediately,” it wrote. “Of note, while the spin-off process is progressing, the Company could also explore whether any of the prior bidders for Office Depot remain interested, or if additional prospective buyers may have emerged in the improved M&A environment.”

The second issue, AREX wrote, is the view that the Varis B2B procurement platform business is seen as a “cash-burning science project.”

Between operating losses, capital expenditures, and the 2021 acquisition of cloud-based enterprise procure-to-pay software developer BuyerQuest, AREX estimates that ODP has already invested over $300 million in Varis, yet that organization is expected to generate under $10 million in revenue in 2023, most of which comes from BuyerQuest subscriptions.

“We suspect the 2025 Varis revenue objective of $120 million that was presented little more than a year ago at the Company’s Investor Day is now internally acknowledged to be wildly unachievable,” it wrote.

Varis is still a highly-speculative, cash-consuming venture capital prospect, one that does not fit with ODP’s business and especially given the investment ODP lost with its CompuCom business, AREX wrote.

ODP should immediately explore the divestiture of at least a majority stake in Varis, or better yet sell it completely, it wrote.

“The Company should not be concerned with whether the valuation achieved in either scenario even approximates its basis—the simple reality is that the highest price that a third party is willing to pay for Varis today is, in fact, the value of the asset,” it wrote. “And if no third parties are willing to invest capital into or acquire Varis at any price, that too speaks volumes about the project’s prospects and would provide clear evidence of the need to immediately shutter it. In short, simply continuing the status quo at Varis is unacceptable.”

Spinning out Office Depot and divesting itself of Varis would, in AREX’s estimation, result in value to ODP shareholders of about $75 per share, or nearly 50 percent over current levels, based on AREX’s forecasts for 2024, and about $81 per share based on 2025 forecasts.

It would also bring make available an increase in capital of about $875 million for share repurchases, it wrote.