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Starboard Value LP (together with its
affiliates, "Starboard"), the largest common stockholder of Office Depot, Inc.
("Office Depot" or the "Company"), with a 14.8% ownership stake,
announced today that it has delivered a letter to the Board of Directors of
Office Depot (the "Board"). In the letter, Starboard expressed strong
disappointment at the Board's failure to work constructively with Starboard to
reconstitute the Board. Starboard stated that it is uncomfortable with the
execution and experience of the current Board and is, therefore, seeking to
add to the Board a number of individuals with significant retail operating
experience who are far more qualified than the majority of the existing
Board. Starboard noted that while it is in favor of the proposed merger with
OfficeMax Incorporated ("OfficeMax"), it still feels it is critically
important to substantially improve the Board as soon as possible to ensure
that the Company is fully prepared to succeed as a stand-alone entity should
the merger not close and be a stronger merger partner for the combined company
should the merger be consummated. The letter also pointed out that it has
become clear that the Company has no intention of holding the 2013 Annual
Meeting of stockholders in a timely manner. Accordingly, conducting a consent
solicitation is the only alternative available to Starboard at this time for
providing stockholders with an opportunity to elect directors whom they
believe will serve and protect their best interests in the boardroom.
Starboard concluded that it would consider possibly foregoing its consent
solicitation if the Board immediately commits to a framework that would
provide for the addition of its highly-qualified candidates to the Board.
The full text of the letter is below followed by the biographies of
Starboard's highly-qualified director candidates:
April 22, 2013
Members of the Board of Directors of Office Depot, Inc.
Office Depot, Inc.
6600 North Military Trail
Boca Raton, FL 33496
Dear Members of the Board,
Starboard Value LP, together with its affiliates ("Starboard"), currently owns
approximately 14.8% of the outstanding common shares of Office Depot, Inc.
("Office Depot" or the "Company"), making us Office Depot's largest common
stockholder. Additionally, pro forma for the proposed merger of Office Depot
and OfficeMax Incorporated ("OfficeMax" and the proposed merger, the
"OfficeMax Merger"), we believe Starboard would be the largest stockholder of
the combined company.
As a reminder, on September 17, 2012, we sent a letter to the Board of
Directors of Office Depot (the "Board") outlining a number of initiatives to
substantially improve value for stockholders. These initiatives included,
among other things, thoughts on how to dramatically improve the operating
performance of the Company by approximately $300 million to $500 million by
significantly reducing expenses as well as our belief that the Company's 50/50
joint venture ownership of Office Depot de Mexico (the "Mexico JV Interest")
is non-core and has substantial hidden value.
We also stated that we had identified a number of individuals with significant
retail operating experience who are far more qualified than the majority of
the existing Board and we expressed our desire to join the Board to help the
Company implement our proposed initiatives and create value for stockholders.
We also repeatedly expressed our willingness to join the Board alone because
we believed our experience and interest in Office Depot could be valuable in
the event that the Board were to undertake any potential negotiations with
either OfficeMax or relating to the Mexico JV Interest. Unfortunately, rather
than work with us, the Board has ignored our offers. While it is always
difficult to criticize past behavior regarding a negotiated transaction, we
strongly believe that had we been involved on the Board, both the OfficeMax
Merger, as well as the outcome of exploring alternatives to maximize the value
of the Mexico JV Interest, would have been handled far better for the benefit
of Office Depot stockholders.
Since the announcement of the OfficeMax Merger, we have continued to have
private discussions with you regarding Board representation. We have made it
clear to you that given the past underperformance of the Company under the
current leadership and Board, we are uncomfortable with the execution and
experience of the Board as currently composed. We have continued to state
that a large number of very important decisions will need to be made over the
next several months, which extend beyond the selection of the CEO and the
selection of board members to any combined board. Adding new,
highly-experienced directors to the Board now would substantially improve the
outcome of those decisions, as well as many others, and would avoid missteps
to be criticized after the fact. Similarly, if the OfficeMax Merger does not
close for any reason, a highly-qualified Board will be far better equipped to
choose the right management team and more successfully oversee the Company as
a stand-alone entity.
While we are in favor of the OfficeMax Merger, we still feel it is critically
important to substantially improve the Board as soon as possible. Office
Depot must begin to plan and build a strategy for a far improved company
immediately. Contrary to what you and we might hope, the OfficeMax Merger is
not certain to close. The Board and management, therefore, need to plan and
prepare now to make Office Depot as strong as possible. Early planning will
ensure that the Company is fully prepared to succeed should the OfficeMax
Merger not close and will be a stronger merger partner for the combined
company should the OfficeMax Merger be consummated. Improving the Board today
is in the best interests of the Company, the employees, and the stockholders
of both Office Depot and OfficeMax.
As an example, we are deeply frustrated by the Board's lack of action
regarding the sale of the Mexico JV Interest. On February 27, 2013, we sent
you a letter asking the Board to promptly obtain consent from OfficeMax under
the merger agreement to immediately explore a sale of the Mexico JV Interest
to maximize value for stockholders. In our letter, we stated that a sale of
this asset at a full and fair price is in the best interest of both Office
Depot and OfficeMax stockholders if the OfficeMax Merger is completed as the
Company would have a significantly stronger balance sheet from which to
transform the pro-forma company and execute on any and all potential
synergies. Similarly, if the OfficeMax Merger is not completed for any
reason, then Office Depot stockholders would benefit from the sale because the
stand-alone company would be financially stronger having sold the asset. On
March 12, 2013, we followed up with a private letter once again urging the
Board to send a formal written request to OfficeMax and setting forth our view
that, consistent with the merger agreement, OfficeMax's approval should not be
unreasonably withheld given the clear benefits to stockholders of such a
potential sale.
Almost two months have passed since our first letter asking the Company to
obtain consent from OfficeMax and many more since we first wrote to the Board
to impress the importance of exploring alternatives to monetize the valuable
Mexico JV Interest. Yet, there is no evidence that the Board is considering an
exploration of alternatives for the Mexico JV Interest, or whether any formal
request has even been sent to OfficeMax or has been unreasonably denied.
Lost in all the excitement of the pending OfficeMax Merger, is the Board's
apparent complacency with regards to the Company's continued poor operating
performance. Last quarter's poor results, with same store sales down
approximately 7%, and the reduction in year over year operating profit by
approximately 28% are just the latest in a long history of underperformance
under the stewardship of the current Board and management team. As we have
repeatedly stated, we believe the current Board and management of Office Depot
lack the critical experience necessary to oversee a substantial improvement in
profitability and the transformation of the Company. Of the ten directors
currently on the Board, only two directors have relevant retail operating
experience outside of Office Depot.^^[1] Further, the CEO, Neil Austrian, has
no prior relevant retail operating experience outside of Office Depot. Even
more concerning is the Board's decision to entrust the CEO role to someone
with no retail operating experience when it is clear that the Company needs an
experienced retail executive to transform the business. It is important to
point out that since the beginning of Mr. Austrian's tenure as CEO in October
2010, the stock price has declined by approximately 20% to date and by
approximately 48% prior to Starboard's filing of an initial Schedule 13D with
the SEC on September 17, 2012. In fact, despite revenue declining by
approximately $1 billion over that time, total general and administrative
(G&A) expenses have actually increased and the operating margins of the
Company are lower than both Staples, Inc. ("Staples") and OfficeMax.
Office Depot does not have the luxury of simply hoping that everything works
out down the road. It is important to remember that Office Depot used to be
the leading office supply retailer until a merger with Staples failed to close
in 1997 and, unlike Staples, Office Depot was not prepared to execute as a
stand-alone business. We do not want the risk of history repeating itself.
Office Depot needs to have the best Board and management team possible to
improve the operating performance of the Company now. An improved Board and
management team with a solid plan to improve profitability and stockholder
value will not only make Office Depot a stronger stand-alone company, but will
also drive improved results that will accrue to the benefit of OfficeMax
stockholders in a merger and increase the chances of the merger being
successful. However, it is critically important that a new enhanced Board
starts now to implement a plan for the short term and the long term future
success of the Company. Only then will the Company be fully prepared to
succeed under any circumstance.
Over the last several months, we have made every effort to work constructively
with you to reconstitute the Board. In our latest conversation, we offered to
simply add four of our experienced nominees to the Board right away so that
none of the current Board members would need to leave the Board at this time.
We also offered that only two of our highly-qualified nominees would be among
the five directors contributed to any combined company board, thereby leaving
three other available spots which would presumably be filled by Nigel Travis
(in our view, the most qualified incumbent Board member with substantial
retail experience) and two other directors (hopefully, highly-qualified
directors with relevant experience). This way, we believe that the Board can
be strengthened with true industry experts and a stockholder representative in
the boardroom to ensure that the Company is prepared for whatever challenges
it may face in the future regardless of the outcome of the OfficeMax Merger.
Unfortunately, we are still awaiting a response to our offer and fear that,
like all other constructive suggestions we have made, it has fallen on deaf
ears as the Board continues to entrench itself rather than look out for the
best interests of stockholders. We have come to believe that the current
Board may not only be less than ideally qualified, but may also be fractured
and unable to make hard decisions that would clearly be in the best interests
of all stockholders.
It has also become clear at this time that the Board has no intention of
holding the 2013 Annual Meeting of stockholders in a timely manner under
Delaware law and will instead continue to delay the meeting to frustrate the
ability of stockholders to choose their representation on the Board. We note
that the Company held its 2012 Annual Meeting on April 26, 2012 and filed its
proxy materials on March 15, 2012. We further note that the Company has held
its Annual Meeting during the latter half of April for at least the past six
years. Your response in our last meeting that the Company had to delay the
2013 Annual Meeting because of the announced OfficeMax Merger is entirely
untrue. As we pointed out in our meeting, OfficeMax, your merger partner, has
already set an annual meeting date of April 29, 2013, consistent with its
previous years' annual meetings, and has already filed its proxy materials.
Office Depot's stockholders deserve the opportunity now, without further
delay, to elect the directors they want to represent their best interests (i)
during the pendency of the proposed OfficeMax Merger, (ii) in selecting the
future CEO of the Company and (iii) in selecting the directors who would be
eligible to serve on the pro forma board should the proposed OfficeMax Merger
be consummated.
Accordingly, we have no choice but to seek to bypass the ineffectiveness of
the current Board by commencing a consent solicitation to give the
stockholders of Office Depot an opportunity to elect their representation
without further delay. The consent solicitation process allows stockholders
to take action in the absence of a stockholder meeting by obtaining and
delivering the requisite number of written consents equal to the vote that
would be required to approve such an action at a stockholder meeting. Earlier
today we filed preliminary consent materials with the SEC in furtherance of a
consent solicitation aimed at seeking stockholder approval to remove and
replace up to four members of the current Board with our highly-qualified
director candidates. Among the four current Board members we are seeking to
remove is one designated Board member who represents the interest of BC
Partners, Inc. ("BC Partners") on the Board. We have discussed the truly poor
governance implications of the arrangement with BC Partners in a prior letter,
but note that among the terms of the investor rights agreement with BC
Partners is a provision that even if stockholders remove one of BC Partners
designated Board members a replacement BC Partners designee will be added back
to the Board. We, therefore, fully understand that we are ultimately
providing stockholders the opportunity to add our four highly-qualified Board
candidates, while removing three poorly-qualified incumbent directors and
effectively expanding the Board to eleven members to accommodate the
re-appointment of such BC Partners designee.
To be clear, the extraordinary action of launching a consent solicitation in
this situation should be unnecessary and is entirely frustrating. We believe
the current Board clearly lacks the requisite skill sets to dramatically
improve the performance of the Company. We cannot sit idly by and continue to
accept a Board that is interested in entrenching itself and overseeing a
business based entirely on hope. We feel strongly that the Board needs to be
stronger and far better prepared for all eventualities. We would consider
possibly foregoing our consent solicitation if the Board immediately commits
to a framework that would provide for the addition of our highly-qualified
candidates to the Board. In the meantime, however, we must continue to
reserve our rights to pursue all necessary steps, including the consent
solicitation, to ensure that Office Depot stockholders are provided with the
opportunity to elect directors they believe will serve and protect their best
interests in the boardroom.
Best Regards,
Jeffrey C. Smith
Starboard Value LP
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