Exclusive-AREX Capital urges Office Depot owner ODP to split off units-letter

By Svea Herbst-Bayliss

NEW YORK (Reuters) – AREX Capital is urging office supply company ODP Corp. to separate its brick and mortar retail unit and sell its procurement platform Varis, according to a letter seen by Reuters, arguing that splitting apart the company’s businesses would boost its share price by at least 50%.

The hedge fund, which owns roughly 1% of ODP, praised the company’s ODP Business Solutions group which sells everything from printer paper to janitorial supplies to businesses and its Veyer service delivery unit for delivering steady growth.

Its retail office supply unit, which operates Office Depot and OfficeMax, and the Varis division, however, are hurting prospects for the company currently valued at $2 billion, AREX wrote to the board. A copy of the letter was seen by Reuters.

“Structural changes are necessary for ODP’s share price and valuation to have a chance to approximate the fair value of its underlying assets,” wrote Andrew Rechtschaffen, AREX’s managing partner, and James Corcoran, a partner.

The share price could rise by 60% to $80 a share over the next one to two years, according to AREX’s calculations. It closed at $51.21 on Friday and has climbed 12.5% since January.

The hedge fund is ratcheting up pressure now to push ODP to move more quickly and find alternatives one year after management and the board rejected interest from rival bidders, including Staples, and announced plans to stay independent and retain its current business mix.

AREX also hinted it might pursue a board challenge next year if the status quo is maintained.

ODP did not immediately respond to a request for comment.

AREX suggested ODP sell a piece or all of Varis.

“A full sale of Varis would provide ODP with additional capital for share repurchases, further focus the enterprise, and vastly improve the ODP investment story,” the letter said.

Results at Varis, including this year’s expected revenue of around $10 million, are “unambiguously disappointing”, the letter said, noting ODP should use capital to buy back more shares instead of funneling more cash into Varis.

The hedge fund also took aim at ODP’s retail business, which it says causes the entire company to be seen as a “challenged brick-and-mortar retailer.”

“This misperception will likely persist for as long as Office Depot contributes a meaningful portion of the Company’s EBITDA (a measure of core profitability),” the letter said.

AREX, which has owned ODP stock for years and has held discussions with the company, wants management and the board to act more forcefully to boost returns for shareholders. Should the pace be too slow, AREX said it may “consider taking additional steps,” signaling a possible future board challenge.

At the same time Rechtschaffen and Corcoran praised ODP, where CEO Gerry Smith took a medical leave in September, for “solid execution” and buying back shares.

If the company made some changes to its capital structure it would have $875 million more available to repurchase shares, a move that could boost the share price by roughly 90% to nearly $100 per a share, the hedge fund argued.

(Reporting by Svea Herbst-Bayliss, editing by Deepa Babington)