Theory about CE share price: plausible

Two days ago, I wrote a post in which I explained why I believed the share price of CE was trading above EUR 10.00 per share. Today the closing price of CE was an astonishing EUR 10.74 with less than 100k shares traded. At 17:30 Amsterdam time, Staples was trading at $ 23.98, with a EUR/USD exchange rate of 1.57. With the 1.42 conversion factor I estimated in my previous post this would give a fair value of the CE share price of EUR 10.76. With the actual and calculated price so close, it seems plausible the CE share price is now a function of the Staples share price and EUR/USD exchange rate. Staples also today announced the settlement of the post acceptance period. (end of post)

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CE trading above EUR 10,00 per share !

Although the reason for the existence of this blog is rapidly coming to an end, I have to admit CE is still keeping things interesting. After the end of the post acceptance period Staples informed us that they now have about 99.3% of the issued ordinary shares of CE. This means that about 1.3 million shares have not been tendered, and these are the shares that are still being traded now. So why are these shares trading above EUR 10.00 per share?

My theory is that with the end of the post acceptance period, Staples will start a process through which they will acquire the remaining shares of CE, either through a squeeze out, or through a legal merger. Since Staples has acquired more than 95% of the shares, the squeeze out procedure seems to be the logical choice. The price that Staples needs to pay in the case of a squeeze out procedure, will be determined by the corporate division of the Amsterdam court. Since there is no obligation anymore to pay cash for the remaining CE shares, I believe it is possible that there will be a conversion of CE shares for Staples shares.

The conversion factor will need to be fair, and I believe that this conversion factor will be established with the Staples share price at the end of the post acceptance period. On July 16th, when the post-acceptance period ended, the share price of Staples opened with a share price of $ 20.65 and closed at $ 21.18. Using the average of these two prices, and an exchange rate of about 1.5870, the Euro equivalent of a Staples share would be EUR 13.18 at that date. With these assumptions, a fair conversion factor would be 1.42 shares of CE for each share of Staples.

At the close of European trading today, Staples was trading at $ 22.26, while the EUR/USD exchange rate was 1.5875. According to the theory explained above, this would give a value of a CE share of EUR 9.87, while the closing price of CE was EUR 10.03.

In case current shareholders will not receive cash anymore, but Staples shares, it seems logical that CE shares are now fluctuating with the Staples share price. I am not sure however if this will be the case, but it would explain to some extent the current increase in the share price of CE.

It is still strange to me that the price seems to go beyond a reasonably calculated price, based on the Staples share price. In the post acceptance period I was already surprised about the fact that the CE shares sometimes traded well above the final offer price of EUR 9.25. Probably some market participants have better information than I have, about the final outcome for the last few CE shares.

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Staples Settles Its Offer for All Outstanding Securities of CE

In this news release Staples is confirming that the offer for the outstanding securities has been settled. Investors who have not yet tendered their securities can still do so until July 16th. It was very interesting to observe that the ordinary shares have been trading recently for prices well above the offer price of EUR 9.25, which seems quite strange. I can only think of a last minute short squeeze, but admittedly, this is not a very satisfactory explanation.
We also learn that it is expected that the last day of trading of ADS's on the NYSE will be on or about July 18, and the last day of trading of the ordinary shares and preference A shares on Euronext will be on August 6. (end of post)

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Moody's downgrades Staples unsecured debt

It seems there is another price to be paid by Staples for the acquisition of CE. We can read here that Moody's has downgraded the senior unsecured rating of Staples debt to Baa2 from Baa1, citing the "sharp rise in leverage that results from Staples' fully priced acquisition of Corporate Express." It is pretty obvious that, given the problems in international financial markets, shareholders of CE got a really good deal with the acquisition by Staples. In this challenging environment, the sooner Staples demonstrates the benefits and synergies from the acquisition for their shareholders, the better it will be. (end of post)

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Contract CFO of CE changed

CE issued this short press release, stating that the offer from Staples is now unconditional. More interestingly, the same release also stated that an agreement has been reached with Mr. Floris Waller, CFO of CE, whereby his contract of employment for an indefinite period of time will be modified and continued initially for a period of 6 months. It seems logical that the services of Mr. Waller will not be required much longer, when CE becomes integrated in Staples, instead of being an independent listed company. Given the events of the last 5 months, I find it hard to imagine that there is a warm relationship between Mr. Sargent and Mr. Ventress, the CEO of CE, and I would not be surprised if the career of Mr. Ventress in Staples will not last very long either. (end of post)

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Staples Declares the Offer for all Outstanding Securities Unconditional

As expected, Staples today declared the offer for all outstanding securities unconditional, and shareholders can expect payment by July 9th for their tendered securities. Staples also decided to provide for a post-acceptance period until July 16th, with settlement on July 23rd (which is effectively after 5 business days). Since this proposition is as close as it will get to a riskless investment, investors with cash available could consider buying shares and tendering them immediately. Assuming a price of EUR 9.17, which was the close of today in Amsterdam, return would be almost 0.9% for a holding period of only 3 weeks, which is about 16% annualized. Compared to the 1-month EURIBOR rate of about 4.4%, this is not bad at all. (end of post)

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Staples' Tender Offer Receives Overwhelming Acceptance from CE Shareholders

In this news release from Staples we can read that at the end of the acceptance period the following was tendered (or already with Staples): 95.2% of ordinary shares, 99.7% of preference shares A and 99.1% of convertible bonds. On or before July 2nd, Staples will announce whether the remaining conditions to the offer have been satisfied and whether the offer will be declared unconditional, which obviously is very likely with these high percentages.

Since the minimum level of 95% for a squeeze-out procedure was reached, it is not so obvious if a post acceptance period will take place, since this will take additional time, and will most likely not prevent the necessity for a squeeze-out procedure. If Staples declares the offer unconditional without a post acceptance period, chances are that the share price will drop further from the closing level of EUR 9.17 last Friday.

It is however very likely that the share price in the squeeze-out procedure will be equal to the offer price of EUR 9.25, since the rights of minority shareholders in these situations are fairly well protected, and the offer price will be deemed to be a fair price. Since the procedure will maybe take up to 3 months, it would be normal if the share price of CE will continue to trade at a discount to the offer price, which may give some opportunities to last minute speculators.

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CE closes at EUR 9.26 on Thursday

I thought I would mention that ordinary shares of CE closed at a price higher than the acquisition price today in Amsterdam. With less than 2 hours of trading left, CE started to trade at a price of EUR 9.26, with even some transactions at EUR 9.27, which puzzles me. It seems unlikely that Staples is buying, because that would mean they would have to pay the higher price to all other shareholders who tender their shares. The only reason I can think of, is that there are some shorts that are forced to cover at the last minute, but that seems very irresponsible and strange. Maybe the last trading day will also show some interesting movements.

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Staples Increases Offer Price per Preference Share A to EUR 3.60

Today, after trading hours in Europe, Staple issued a news release, informing us that they have raised the offer price for the preference shares to EUR 3.60. Apparently the combination of the neutral recommendation by CE, and the concentration of a large number of preference shares in the hands of a few parties has led to this result. It does make sense that Staples has increased the offer, because the holders of preference shares would probably have been successful in achieving a higher value, when Staples wants to liquidate the CE holding company.

In the position statement, CE mentions the following about the preference shares:

"However, the Boards have noted that the Articles of Association of Corporate Express state that cancellation of Preference Shares A is only possible against an amount ("the Cancellation Value") equal to the sum of:

� the “yield basis” of €3.40355; and
� the accrued dividend for the year.

On the basis of the Cancellation Value, the Offer price of €3.15 per Preference Share A does not compare favourably to the Cancellation Value. "

So my guess is that the low offer on the preference shares, which was entirely based on the market price of the preference shares prior to the offer, with only a modest premium, could have resulted in a low tender of these preference shares. This may not have resulted in a failed acquisition, since the 51% minimum level can also be achieved without the preference shares.

But obviously Staples wants to own the whole company, and does not want to be stuck with minority shareholders, who have protection in a squeeze out procedure. They must have reasoned that it is better to deal with it now, instead of later, which can only be sensible.

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Staples buy unlikely to impact Corporate Express IT operations

I suspect there is not going to be much exciting news anymore with respect to the acquisition of CE by Staples in the next couple of weeks, so anything that gives some insight is welcome. In this article from ARN we can learn a little bit more about the Australian activities of CE. For those who were not aware of this, CE Australia is an indepently listed company, in which CE holds 59% of the shares. It is also one of the more profitable parts of the company. (end of post)

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CE Extraordinary General Meeting of Shareholders

I assume most readers have not taken the trouble to watch the webcast of the above mentioned meeting. It was a bit of a sad display with dissatisfied shareholders asking questions, mainly to Mr. Meysman, the chairman of the supervisory board. There were however a couple of interesting pieces of information. One is that CE internally had given itself a valuation of EUR 8.50 on a stand alone basis, which gave justification to calling the Staples offer a fair value. Another interesting fact was that Mr. Meysman mentioned that it had been impossible to get enough support for the Lyreco deal, which made it pointless to put this deal to a shareholders vote. I suspect management still doesn't like the Staples deal at all, but just had no option other than going along with it.
In the webcast the approval from the European Commission was mentioned, but also using the Staples press release as the source, like all other press did today. I still find it very strange that we have not seen a press release from the European Commission about the approval. (end of post)

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Staples Obtains Clearance in the European Union

In this news release from Staples they announced that clearance has been obtained from the European Commission with respect to the outstanding offer for Corporate Express. It is strange that it has not yet been announced by the European Commission themselves, but I am sure we can expect their news release today. This final regulatory hurdle means it is now all up to the shareholders of CE, and the acquisition is almost a fact. With an expected settlement date of July 9th, and a current share price of 9.21, there is only 0.4% to be earned for risk arbitrage players, which is equal to about 6.0% on an annualized basis. (end of post)

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Where is the European clearance?

Today was the day where we expected to receive clearance from the European Union for the acquisition of CE. As Staples mentioned in the news release in the beginning of June when they increased the offer to EUR 9.15 per share:

"Staples is confident that clearance in the European Union will be granted on or before 17 June 2008."

Unless employees of the European Commission are working overtime, no clearance will be received today anymore. Let's hope it is just a time glitch and the clearance will reach us tomorrow, the day of the extraordinary shareholders meeting. If it doesn't, an explanation should be offered to us, either by Staples or by the European Commission. (end of post).

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Fair value settlement CE options

While we are reaching the last stages of the acquisition of CE by Staples, speculators with Euronext listed options, may want to check what will happen with their positions, when they don't liquidate them before the end of the acceptance period. In this case positions will be settled with the so called fair value method, which is explained in this article. Information with respect to volatility and dividend assumptions can be found here. Readers should not be intimidated by the option valuation model that is applied by Euronext. A standard Black & Scholes model, adjusted for dividend, will give a fairly correct estimate of the fair value. It will also show that, after transaction costs, there are not many opportunities left to take advantage of this acquisition. (end of post)

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Corporate Express publishes Position Statement on Staples offer

This morning CE released a press release announcing the publication of the position statement on Staples' offer to buy the company. The 24 page statement does not offer many new insights, and repeats a lot of known facts. Interestingly the company is taking a neutral stance in respect of the offer for the preference shares. The most interesting new information in the statement was the following:

Furthermore, the two members of the Executive Board will receive a special performance bonus in view of their exceptional efforts over the last period. Mr Ventress will receive an amount equal to €600,000 (before taxes), and Mr Waller will receive an amount of €250,000 (before taxes).

This will now effectively be a cost to Staples, but I wonder who made the decision to grant these special performance bonuses. (end of post)

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Additional information from the CE press conference

Peter Ventres confirmed in the Q&A session of the press conference that a break up fee of EUR 30 million will have to be paid to Lyreco. Mr. Ventress also mentioned that they decided to agree with the deal only last night when Staples agreed to the higher price of EUR 9.25 when they purchased shares outside the regular market. Mr. Ventress refused to disclose who the sellers of the 1.1% of shares were, and stated that this was a question for Staples. Mr. Ventres is very happy and excited about his offer to the new position of president of Staples International, reporting directly to Ron Sargent. (end of post)

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How was a higher price possible?

Many people were under the impression that Staples would not be in a position anymore to increase the offer price further, after they increased the price from EUR 8.00 to EUR 9.15 a week ago. The Dutch Decree on Public Takeover Bids (Besluit openbare biedingen Wft) gives a detailed overview of the process, and both parties have referred to it in their communications with the public. Article 15 of this decree states that the offer price can be increased once, and Staples used that opportunity already. In the news release from CE we can read that article 19 offered another opportunity to increase the price:

Prior to finalisation of the agreement with Corporate Express, Staples Acquisition BV purchased 2,085,403 Ordinary Shares, representing approximately 1.1 percent of Corporate Express’ outstanding ordinary share capital, for a price of € 9.25 per Ordinary Share in a transaction other than a regular on market transaction. Therefore, in accordance with Article 19 of the Dutch Decree on Public Takeover Bids (Besluit openbare biedingen Wft), if the Offer is declared unconditional, Staples Acquisition BV will be required to pay (i) € 9.25 per Ordinary Share validly tendered into the Offer (or defectively tendered, provided such defect is waived by Staples Acquisition BV) and (ii) € 9.25 per ADS validly tendered into the Offer (or defectively tendered, provided such defect is waived by Staples Acquisition BV).

The number of shares purchased by Staples in this transaction comes very close to the amount of share options, issued by CE, that are in-the-money. This could of course be a coincidence, and assuming that Staples agreed to buy the exercised employee options would only be speculation.

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CE recommends all-cash offer of €9.25 per ordinary share by Staples

As the above title suggests, discussions between CE and Staples have been succesful. In this news release CE informs us that they recommend shareholders to accept the increased offer of EUR 9.25 per ordinary share. The increased offer was possible because Staples purchased ordinary shares at the increased price in a transaction, other than an ordinary market transaction. Under Dutch takeover rules this increased price must apply to all other shareholders as well. Peter Ventress will become President of Staples International, to oversee Staples’ business outside of the United States and Canada and will play a key part in managing the integration of the two businesses going forward. He will report to Ron Sargent, Staples’ Chairman and CEO. You can also read the news release by Staples. (end of post)

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Q&A session Peter Ventress and Eric Bigeard

A couple of days ago Dutch financial website IEX published the answers to questions that were submitted by visitors of their website to Mr. Ventress and Mr. Bigeard. I am posting this, because it gives some information directly from the source, but as can be expected, the answers are very predictable and in line with information we already received through other communications from CE about the Lyreco deal. On a question about the better margin of Lyreco, Mr. Bigeard answers that they have a very sophisticated business model, supported by modern distribution centers and a fully centralized IT system. Mr. Ventress answers that CE has a new strategy since October last year. With an answer like this the deal sounds more like a reverse take over, where Lyreco, with the CEO position, will effectively start managing the combined company, and gets paid handsomely for the privilege. (end of post)

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Reuters: "Staples has 9.5 pct of Corporate Express"

It seems there is a lot of confusion with respect to shares and percentages. Reuters tries to play it safe in this article by mentioning both the 9.5% as reported by the AFM and the 12.3% mentioned by Staples. We know of course that Staples was talking about the percentage of ordinary shares, while the AFM looks at total voting rights, including preference shares. And even the AFM is a little confused, because they consider voting rights on preference shares equal to the voting rights on ordinary shares, while I have reasoned before that a preference share has a voting right equal to about 0.37 ordinary share. This would make the right percentage of Staples' shares, relevant to the shareholders meeting on June 18th equal to 11.1%. (end of post)

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