B. Riley Upgrades Office Depot To Buy; Firm Likes Fundamentals And Acquisition Potential

Shares of Office Depot Inc (NASDAQ: ODP) have fallen significantly from mid-year highs due to continued uncertainty regarding its planned acquisition by Staples, Inc. (NASDAQ: SPLS).

In a report published Monday, B. Riley analyst Scott Tilghman argued that "it is unlikely" that the acquisition won't be approved. Regardless, the analyst stated that Office Depot's fundamentals as a stand-alone company support a higher valuation, especially when considering the $250 million (approximately $0.50 a share) termination fee if the merger is blocked.

Office Depot As A Standalone Company

Tilghman noted that Office Depot's retail comps have improved to positive territory, while international sales weakness are attributed to foreign exchange woes and the intentional loss of a barely profitable buying consortium (NABS). Meanwhile, margins continue to improve at the company-wide level as the company looks to focus on underserved markets and demographics.

With that said, the analyst suggested that company-specific efforts alone could drive around $1 billion in fiscal 2016 EBITDA.

Regulatory Approval For Merger Likely

Tilghman said three of the four major markets where Office Depot operates (China, Australia, New Zealand) have already granted approval for a merger. In addition, FTC language highlighted the competitive environment for retail, which "limits our concern" for the segment as the size of a combined Staples and Office Depot is appropriate given the size of the overall domestic market.

Final Thoughts

Tilghman concluded that Staples' offer of $7.25 in cash and 0.2188 shares for each Office Depot share translates to a take-out value above $10 per share based on Staples' "arguably depressed" closing price last Friday. As such, downside in Office Depot's stock should be "limited" from current levels.

Shares were upgraded to Buy from Neutral with an unchanged $11 price target.

Image credit: Stan Zemanek, LizSummers; Wikimedia