Updated Staples-Office Depot Merger Math Shows 'Massive Potential'

UBS’ Michael Lasser maintained a Buy rating for Staples, Inc. SPLS, with a price target of $14, after the first week of the hearing on FTC’s case against the company’s merger with Office Depot Inc ODP.

Shares of Staples and Office Depot have appreciated 11 percent and 22 percent, respectively, over the last few days, indicating that the markets expect a favorable resolution of the case, analyst Michael Lasser noted.

“While this has shifted the risk-reward for SPLS' shares slightly, we still think the stock has a compelling return profile with $1-2 of downside & $5 of NT upside if the deal goes through,” Lasser wrote.

Outcome Still Unclear

The FTC has argued that the combined entity will control nearly 79 percent share of the Fortune 100 office supply market and that courts have “enjoined mergers with much lower combined share in the past. The analyst expects several interesting developments over the next couple of weeks as the hearing progresses, with the ruling expected on or before May 10.

Updated Merger Math

Assuming that the legacy ODP European business is sold and $550 million of the NA contract business is divested, the merged entity is expected to post EPS of $1.62 in FY17 and of $2.05 by FY19.

“In our base case, we arrive at EPS of 1.62 in '17E and EPS of $2.05 by '19E (when the $1 B+ of net synergies are fully realized). In an upside case, we estimate EPS could be closer to $2.63 by '19. If the deal is approved, SPLS should at least trade at 10-11x our pro-forma estimates, if not higher,” the analyst stated.