Llenrock Group

About the Author Llenrock Group

Llenrock Group is a real estate advisory and investment banking firm built on relationships and focused on results. With our unique 360° view and a panorama of services, we bring exceptional levels of experience, responsiveness and creativity to the marketplace. Founded by real estate professionals, our strength lies in the breadth and depth of our relationships — and our expertise. Through our subsidiaries, Llenrock Advisors and Llenrock Realty Partners, we offer a full spectrum of services, including investment sales, direct investment and structured finance. And because we have years of experience in real estate operations, acquisitions and deal structuring, we’re able to do more than just respond to our clients’ challenges — we anticipate them.

The Staples/Office Depot Merger: Some Considerations


Let’s discuss activist hedge fund Starboard Value. The investor has proven extremely influential in the corporate world for its ability to organize shareholders and influence the directions of major companies. I’m speaking in particular of Darden Restaurants (NYSE:DRI), where investor Starboard Value – unhappy with a number of perceived missteps on the part of the company’s leadership – arranged a shareholder vote that replaced the restaurant operator’s executives. The moral of that story: if you’re the head of a company and Starboard Value is one of its shareholders, don’t do anything to make Starboard or its head honcho Jeff Smith unhappy. Not unless you’re in the market for a new job.

I’m interested in this hedge fund because of its significant influence on national real estate activity. Its grip on Darden has made it a significant force in matters concerning restaurant real estate (Darden owns chains like Olive Garden, Capital Grille and Bahama Breeze, to name a few – though it sold Red Lobster to a PE firm, which led to its leadership’s undoing). But Starboard Value will likely have even more influence in the CRE sector in 2015 than it did last year, and this is because of its role in the (tentative) merger of the two largest office supply retail chains, Staples (NASDAQ:SPLS) and Office Depot (NASDAQ:ODP). This is huge news for the retail real estate sector, and if the merger goes through (pending negotiations, shareholder approvals and regulatory stuff), it could strongly affect numerous shopping center owners and operators (for good or ill, depending on how the merger’s “synergies” affect cost cuts and potential store closures).

I discussed the whole merger possibility a couple weeks ago, particularly with regard to Starboard Value’s role in the proceedings and its potential benefits from any merger/acquisition deal (SV is a stakeholder of both companies, importantly, so it should be no surprise that it’s looking for ways to optimize the companies’ revenue while trimming expenses). Here’s what Commercial Property Executive reports about the Staples/Office Depot merger talks:

Staples, Inc. has agreed to acquire box-store rival Office Depot for $6.3 billion, with the combined companies expected to better compete with e-commerce and other office supply competitors in the market.

Combined, the two companies represent $39 billion in annual sales from more than 4,000 stores. Staples was already the largest office-supply superstore, while Office Depot merged with OfficeMax Inc. in February 2013, the second- and third-largest at the time, to consolidate and save on costs.

Some argue that Staples’ best strategy for growth (or at the very least, survival) is to reshape its various lines of business, particularly when it comes to competing with Amazon (NASDAQ:AMZN) on the e-commerce front. After all, Staples, in its present form, is well positioned for retail success – in 1996, that is. Today, however, the company seems behind the times. Let’s look at some factors that have reshaped the retail sector as it relates to office supplies:

  • Internet retailers offer greater convenience and affordability for consumers, particularly when ordering large quantities (e.g., of paper, coffee filters, pens, etc.)
  • The digital age has likewise made paper and related implements – not obsolete, exactly, but far from universal. This means there is a not-insignificant decrease in demand for many of Staples’ core merchandise offerings – paper, printers and ink, notebooks, pens, envelopes, etc. While these things are far from obsolete, email and word processors have certainly made them less indispensable. All of this applies to the store’s printing, copying, and mail services, too.
  • As retailers in general have grown their inventories and store footprints, office retailers like Staples have found themselves in the unenviable position of competing with many peripheral retail segments. Drug stores, grocery stores, discount/dept. stores like Wal-Mart and Target, and electronics retailers have all cannibalized office supply retailers’ consumer base. Today, there are very few items at a Staples that one can’t find at another brick-and -mortar retailer.

I was initially skeptical about the feasibility of a Staples/Office Depot merger. This recent news about Staples’ offer suggests the merger is quite possible, but I’m still not convinced of its long-term efficacy. The retailer’s leadership has made it clear that the “synergies” resulting from this consolidation will allow for greater efficiency from a real estate standpoint, greater market saturation, plenty of opportunities for cost-cutting (closing stores, shedding personnel on both the sales floor and back offices), and a virtual monopoly in the brick-and-mortar office supply business. But how good is a monopoly in a flagging retail segment?

Sure, there is still demand for office products, printing and mail services, etc., but not enough to keep a behemoth of a retail chain in business. It seems the company’s smartest move – not to mention boldest – would be to go after Amazon with everything they’ve got. This, of course, means working to attract corporate accounts that require bulk orders of office goods, and the way to score that business is by competing on price and convenience (fast shipping times are crucial). It’s certainly a gamble, not to mention an enormous cultural and operational shift for the company, but I suspect its online channel is crucial to long-term growth and survival.