Starboard Releases Letter to Staples Board of Directors

NEW YORK, March 4, 2015 /PRNewswire/ -- Starboard Value LP (together with its affiliates, "Starboard"), one of the largest shareholders of Staples, Inc. ("Staples" or the "Company") SPLS, with a 4.5% ownership stake, today announced that it has delivered a letter to the Company's Board of Directors.

The full text of the letter follows:

March 4, 2015

Members of the Board of Directors of Staples, Inc.     
Staples, Inc.
500 Staples Drive
Framingham, MA 01702

Dear Members of the Board,

As you know, Starboard Value LP (together with its affiliates, "Starboard") is currently one of the largest shareholders of Staples, Inc. ("Staples" or the "Company"), with a 4.5% ownership stake in the Company.  Thank you for taking the time to meet with us this week.  We appreciate your willingness to have candid and open discussions with us. As you know, we believe the constructive attitude of management and the Board of Directors (the "Board") towards us, so far, has been helpful in building a productive relationship. 

We are pleased that you have negotiated and announced an acquisition of Office Depot, Inc. ("Office Depot").  We believe that the strategic and financial logic behind this transaction is undeniable, and that the magnitude of value creation from a Staples-Office Depot combination will far exceed anything that either company could achieve on a standalone basis.  The combination of Staples and Office Depot will create an industry-leading office supply retailer with an optimized cost structure that will allow it to prosper despite the continued secular decline in office supplies and increased competition.

We believe that Staples' current stock price remains undervalued relative to the potential synergies and earnings growth for the combined company.  We believe that management's current estimate of synergies will prove to be conservative and that the actual amount realized could be more than $2 billion.  These synergies can be realized by reducing duplicate corporate overhead and advertising expenses, combining and optimizing the retail store footprint, reducing purchasing expenses, and combining Staples' Contract and International businesses with those of Office Depot.  In addition, the combined company will be able to pursue long-term growth initiatives and operational improvements, such as expanding the online business and omni-channel initiatives, expanding into higher margin services, including copy & print, and reducing the number of retail SKUs while testing new small-store formats.

Given the substantial opportunities outlined above, we expect that when the announced merger is completed, Staples will raise its total synergy forecast as management gains increased visibility on cost savings.  Fully realizing the potential synergies between Staples and Office Depot will result in a dramatic increase in earnings and free cash flow. Based on our assumptions, we believe that Staples could be worth between $32.00 - $37.00⁽¹⁾ per share once the acquisition of Office Depot is completed and the combined company begins realizing synergies.  This represents an increase of 88% to 118% relative to the current share price.

After speaking with you, it is clear that we share the same top priorities, which are to make sure that the announced transaction is completed and that the integration is well-executed.  However, we also recognize that shareholders are frustrated with Staples' historical performance.

While we commend the Board for evaluating, pursuing and ultimately announcing the acquisition of Office Depot, we are mindful that the stock price performance, operating performance, and corporate governance of Staples prior to this announcement had been suboptimal.  Over the past two years, Staples management has pursued a standalone strategy that has resulted in a 31% decline in earnings per share.  Prior to merger speculation, Staples' share price had declined more than 38% over the previous five-year period, dramatically underperforming its peer group.  Furthermore, the current Board and management team ignored a clear mandate from shareholders, waiting more than seven months to respond to a vote against named executive officer compensation and for a separation of the Chairman and CEO role.  The Company has yet to fully address the concerns raised by these vote results.

As we discussed, completing and then ultimately integrating the acquisition of Office Depot will require close oversight from the Board.  The combined company's board must have the proper skill set in place to oversee the integration of two large companies with more than $37 billion of combined revenue, and approve a new business strategy to maximize success over the long term.  Shareholders need to have confidence that you will be able to complete this transaction and then execute far better than in the past in order to effectively integrate and perform as a combined company.  This is a difficult task and will require having the right people in place.  To that end, as we have discussed with you, we believe that it would be beneficial to improve the composition of the Board to ensure successful deal completion and efficient integration of the two companies. 

This is an exciting time and critical turning point for Staples.  We trust that you will seriously review and consider our suggestions for improving the Board and that we can work together to enhance oversight at Staples.  We look forward to continuing our dialogue with you.

Best Regards,   

Jeffrey C. Smith
Managing Member
Starboard Value LP

(1) Assumes $2.2 billion estimated synergies realized over 3 years and a valuation range of approximately 6–7x EV/EBITDA or 11–13x P/E.

About Starboard Value LP
Starboard Value LP is a New York-based investment adviser with a focused and fundamental approach to investing in publicly traded U.S. companies. Starboard invests in deeply undervalued companies and actively engages with management teams and boards of directors to identify and execute on opportunities to unlock value for the benefit of all shareholders.

Investor contacts:
Peter Feld, (212) 201-4878
Gavin Molinelli, (212) 201-4828
Tom Cusack, (212) 201-4814
www.starboardvalue.com

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SOURCE Starboard Value LP