How Office Depot Is Taking a New Strategic Direction

Office Depot Inc. (NASDAQ: ODP) saw its shares dip on Wednesday after the firm announced that it would be changing its business model and taking a new strategic direction as a company. As part of this shift, Office Depot is acquiring CompuCom Systems to move into a broader business services and technology products platform. The firm also gave a preliminary estimate of third-quarter financial results and a lowered outlook for Office Depot’s stand-alone business for 2017.

For some quick background: CompuCom is a market-leading provider of award-winning IT services, products and solutions that enable the digital workplace for enterprise, small and midsize businesses.

Under the terms of the agreement, Office Depot will acquire CompuCom from Thomas H. Lee Partners (THL), for $1 billion, which includes the repayment of CompuCom debt and issuance of new Office Depot shares. Following the transaction, THL will hold an equity position in Office Depot of roughly 8% of total shares outstanding.

The combined company expects to capture $25 billion in market share. At the same time, CompuCom is adding $1.1 billion in revenue, and it is expected to deliver cost synergies of over $40 million within two years.

Gerry Smith, CEO of Office Depot, commented:

Technology is the office supply of the future. Today marks a significant milestone as we move to provide a unique business services platform for our current and future customers. Acquiring CompuCom is the first step in this new strategic direction. The combination of CompuCom’s enterprise IT services with our millions of customers and approximately 1,400 distribution points gives us the credibility and scale to build a sustainable platform and stand apart from the competition. The company will create value for shareholders from a diversified revenue base with a clear opportunity to grow higher value services and business-to-business revenues.

In terms of the outlook for the third quarter, the company expects to see operating income in the range of $125 million to $135 million and a total sales decline in the range of 7% to 8%. The consensus estimates call for earnings of $0.17 per share and $2.63 billion in revenue for the coming quarter.

Shares of Office Depot were last seen down about 15% at $3.92, with a consensus analyst price target of $5.09 and a 52-week range of $3.01 to $6.26.