Update: Office Depot And Staples Possible Merger

| About: Office Depot (ODP)

Summary

Credit Suisse issued a report that states Staples may attempt to purchase Office Depot for an 80% premium.

This report strengthens my bullish conviction on Office Depot, if the merger materializes or not.

In my previous article, I alluded to the gross undervaluation that Office Depot was trading at, as the synergies from the OfficeMax merger would soon become accretive.

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.

The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.