Today, Office Depot (NYSE:ODP) spiked more than 6% after the release of a report by Credit Suisse expecting it to be acquired by Staples (NASDAQ:SPLS). In the report Credit Suisse increased its target price on Staples to $15 per share and opined that SPLS would have to offer an 80% premium to ODP's stock price in order to get the deal done.
Credit Suisse believes that the same synergies that are beginning to become accretive from the Office Depot and OfficeMax merger could apply to Staples and Office Depot. In all, Credit Suisse estimates that synergies could total $1.44 billion, almost doubling operating income of the combined entity by 2017. Credit Suisse also hinted that the merged entity could become a distribution company with a retail segment, as the supplies distribution business is more lucrative and they have a tremendous combined footprint.
In my previous article, "Office Depot: Shortsighted Analysis Leads To Gross Undervaluation," I discussed how the merger with OfficeMax would allow Office Depot to return to profitability. Further, I opined that ODP was undervalued, trading at only 3.35x its cash position, and .41x its total assets. That level of undervaluation certainly could be a harbinger of a merger. Although buying a stock hoping for a buyout is a foolish strategy, this report indicates the power of the synergies that are being created through the Office Depot and OfficeMax merger. Buyout from Staples or not, Office Depot provides a compelling risk/reward opportunity.
Disclosure: The author is long ODP.
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