Office Depot Shuns Over $500 Million Pact; Analysts See Bright Side
July 19 2010 - 1:50PM
Dow Jones News
Office Depot Inc. (ODP) analysts on Monday found positives in
news the office-supply chain had backed out of bidding on a
contract potentially worth over $500 million in annual revenue,
reversing the selling pressure the stock experienced in after-hours
trading Friday.
Friday, Office Depot said it wouldn't submit a bid in Los
Angeles related to the U.S. Communities Government Purchasing
Alliance, a cooperative that aims to secure good terms for supplies
that local and state governmental agencies need. Office Depot has
had the contract since 1996, and it represented roughly $600
million, or 5%, of its 2009 sales.
Office Depot said the "onerous" terms of the contract could have
hurt profitability. Shares moved higher in Monday afternoon
trading, however, following notes from at least three analysts
downplaying the news and highlighting ways the loss of business
might be an overall positive for Office Depot.
Both Janney Capital Markets and J.P. Morgan said Office Depot's
decision demonstrated "discipline," and J.P. Morgan called it the
"right decision for the long term."
Office Depot shares have slumped since the company posted
first-quarter results that missed Wall Street views and warned that
its business remained weak in California, where some 13% of its
U.S. stores are located.
Further, it recently lost its accreditation with the Florida
Better Business Bureau, according to Office Depot, because of its
recent roughly $5 million settlement with "the Florida Attorney
General concerning contract pricing to certain customers in
Florida." Office Depot said it is "optimistic" that the appeal
process will result in restored accreditation.
Plus, Chairman and Chief Executive Steve Odland and two former
employees have received "Wells" notices from the Securities and
Exchange Commission's Miami office notifying the three that the
office made a "preliminary decision to recommend that the SEC bring
civil enforcement actions against them related to possible
violations" of disclosure rules.
FBR Capital Markets, which had expected Office Depot to retain
the majority of the contract, believes the decision to abandon the
bid could even yield a "strategically positive" outcome. The firm
said it believes Office Depot's move will cause Los Angeles and
U.S. Communities to cancel the current bidding process and exercise
their option to renew the current contract, under the same terms,
for one year.
This would mean Office Depot wouldn't have to take on the new,
less-palatable terms, while keeping the revenue stream and giving
the company "another year to regain traction and credibility."
Office Depot in a federal filing said the low operating profits
on the contract mean it "could manage [its] infrastructure costs as
needed in the short term to mitigate the potential financial impact
of the current business not retained." A company spokesman declined
to be more specific.
FBR said OfficeMax Inc. (OMX), a close third to Office Depot in
terms of market capitalization among office-supply chains, is not
making a bid. Industry behemoth Staples Inc. (SPLS), meanwhile, has
itself called the contract terms onerous in the past, and appears
to have a conflict as a result of another contract that could
discourage it from making a competitive bid.
Office Depot shares, off 48% in the past three months, were
recently up 6 cents, or 1.5%, at 4.12.
-By Maxwell Murphy, Dow Jones Newswires; 212-416-2171;
maxwell.murphy@dowjones.com
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