Office Depot Shuns Over $500 Million Pact; Analysts See Bright Side

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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