NEW YORK (TheStreet) - Staples (SPLS) shares surged 9% on Thursday after hedge fund and activist investor Starboard Value disclosed in a regulatory filing that it acquired a 5.1% stake in the struggling office supplies chain.
Starboard believes the shares "when purchased, were undervalued and represented an attractive investment opportunity," according to the filing.
Starboard also disclosed that it upped its stake in Office Depot (ODP) and now owns 9.9% of its outstanding shares. Wall Street is speculating whether Starboard is preparing to propose a merger between the two chains.
Shares of Office Depot were up 13.5% to $7.63 at last check, while Staples shares were up 9% to $16.17. Here's what analysts were saying.
Simeon Gutman, Morgan Stanley (Upgrade Staples to Equal Weight; $14.50 PT)
Given these developments and that they stem from an activist investor with a successful track record in this very segment, we view SPLS as now in play; hence, our upgrade to E/W and a new price target of $14.50 (up from $13). The bottom line is that downside seems protected as fundamentals now take a backseat to activist involvement and possible value creation.
The most likely angle for Starboard is a merger of SPLS and ODP, in our view. Our back of the envelope math for a combination assuming 2% pro forma synergies implies 50% accretion. But merger synergies could be even higher given how much overlap there is between the companies. The greatest risk to a merger is anti-trust, not an uncommon issue for this segment or for these two companies. Yes the landscape is different and the FTC's market definition and approach in ODP-OMX suggest a more expansive view. Ultimately, the pricing power of the two combined entities (OMX-ODP) was not seen as anti-competitive. Given online encroachment and a rapidly evolving office supply segment, SPLS/ODP should be no different. However, this would be a #1 merging with a #2, which is not the same as before (#2 and #3 merger) and thus, it may attract greater scrutiny.
Either way, we believe the possibility of a merger with the kind of upside we estimate bodes well for this stock in the near term.