Staples Increases its Offer to EUR 8.00 per Share

As expected, Staples has moved forward with their intentions to acquire CE. The offer has been increased to EUR 8.00 per share and the offer memorandum has been submitted to the AFM for approval. Details can be read in the news release issued by Staples. In my opinion a couple of observations can be made after reading this news release.

First of all I can't help but have respect for the way Ron Sargent is looking after his own shareholders, which is in line with the way Staples has been managed for quite a while. He understand he is in a very good position, and he is certainly not willing to pay more for CE than is required.

I find it interesting and sensible that Staples has already had discussions with Dutch trade unions. At this stage of the process they must feel it is important to convince other stakeholders of the good intentions of their offer. When trade unions have no objections to the acquisition, it will obviously make it much harder to justify the issue of preference shares to protect against the acquisition by Staples. I believe the risk of this happening was already small, but to pay attention to other stakeholders at this stage makes good sense.

With a minimum required acceptance of 75% of CE shareholders, Staples makes sure that they can control the company, while also allowing for the risk that some shareholders, including some major ones, may elect not to accept the offer. When these shareholders find out that more than 75% has accepted the offer, they will most likely be able to change their minds in a post-acceptance period.

With respect to the value of the offer, I do see some risk. It is very clear that Staples wants this acquisition to take place, and shareholders may see this as an opportunity to improve their bargaining position. The offer of EUR 8.00 per share is at the bottom end of the range that I believed was required to make the acquisition successful. With this offer shareholders may feel encouraged to try to squeeze more out of the deal, which would mean that more time will pass, and possibly a reluctant increase of another EUR 0.50 will be realised.

I am very curious about the length of the acceptance period. If this period is short, Staples may have already anticipated that a last gesture is required. By setting the increased offer low, CE shareholders will realize that there may be something, but not much.

If the acceptance period is long, and closer to the maximum of 10 weeks, I believe this could well be the final offer. CE shareholders than face the risk of an uncertain stand alone future, with a very likely significant price decrease of the shares following the collapse of the deal. As Ron Sargent stated in the press release: "We are offering certain cash value versus the considerable uncertainties of management's long range guidance."

It will be interesting to observe how much opposition there will be for this offer by current shareholders, and what the reaction of CE management will be. Maybe this is the time for CE management to add some value. We will find out soon...

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Will Staples make an offer today ?

(Nederlandse versie hier)
On February 19th of this year Staples made an offer to acquire all the ordinary shares of CE for a price of €7.25 per share. Following Dutch regulations, Staples confirmed after 4 weeks its intention to make an offer. In this announcement Staples also clearly indicated that they were aware of their obligation to submit the offer to the AFM within 12 weeks of the first announcement. They mentioned that this offer memorandum has to be submitted before may 13th, which means today is the last day where this is possible.

In my opinion 3 things can now happen:

1. No memorandum will be submitted and Staples withdraws the offer

This possibility seems small. Staples has indicated several times that they are serious about their intentions to acquire CE. We have also received signals that the company internally is still working on the preparations of the offer. If no offer would be submitted, there is a high likelihood that the shares of CE will experience a significant negative price correction.

2. Staples submits an offer memorandum and confirms the current offer of €7.25, with or without a correction for the already paid dividend.

This would be rather disappointing. With a current stock price well above the offer price the market has already clearly indicated that a higher offer is expected. I would therefore expect that an offer of €7.25 will lead to a tedious continuation of the process with a high likelihood that the acquisition will fail. Since the offer has to be valid for at least 4 weeks and a maximum of 10 weeks, with the possibility of extension, it is possible that a long period of uncertainty will follow. In my opinion this serves nobody. Opportunistic share holders will sell their shares and try their luck elsewhere. Most likely the share price will not be able to sustain the current levels, but will also not have to drop significantly below the level of the offer. A number of uncertain weeks can than follow.

3. Staples will submit an offer memorandum with an increased offer

This would be the most likely scenario, if indeed Staples wishes to acquire CE, with or without the approval of the management of CE. By raising the offer, Staples makes an important gesture to the market, that it is aware of the dissatisfaction with the current offer. I suspect that share holders will understand that a raised offer is better than the alternative that no acquisition takes place. If Staples indeed raises the price in the offer memorandum, I expect an offer of at least €8-8.50. At these levels Staples will be able to defend that the potential synergies from the acquisition are fairly shared with CE share holders.
I expect that initially the share price will trade at a discount of 5-10% of the offer price. While the deadline of the acceptance period comes closer, the discount can diminish, that is if positive signals are received with respect to the acceptance of the offer.

Currently shares of CE are trading around €7.55-7.60, which implies the market expectation of a higher offer. Until an announcement from Staples is received, it is most likely that the market will stay hesitant and will not deviate far from these levels. After an announcement more volume can be expected, with the price direction depending on the message. Also a big question today is if the announcement will be received before closing of the European trading day. In any case it is a very exciting day for CE shareholders.

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SEC filing Staples May 9th

In anticipation of the submission of the offer documents to the AFM there is some movement to be observed. As you can read in this Form 8-K SEC filing of yesterday May 9th, as recently as May 5th, Staples has agreed some changes to the credit arrangements they have in place with a number of banks to finance the acquisition of CE. From this, it seems they are still moving full steam ahead, and an offer can be expected. The big question is if the offer price will already be adjusted. (end of post)

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Staples must formalize CE bid by May 13

On the website of Reuters we can read that Staples has to submit a request for approval of the offer memorandum to the Netherlands Authority for the Financial Markets (AFM) before May 13. The AFM will inform Staples within 10 working days if they have approved the memorandum, after which Staples must make the formal offer within 6 working days. This means we can expect the formal offer in the beginning of June. The article also mentions some analysts, and they come to the same conclusion as I already did; an offer somewhere above €8 per share should get the deal done, although many CE shareholders will scream with disappointment. (end of post)

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CE Q1-2008 performance

This morning CE published the results for the first quarter of 2008, which can be found here on their website. At noon there was also a presentation of the results. The video, audio and presentation slides can be found here. I am disappointed with the net result of just €0.05 per share. I feel sorry for Mr. Ventress, who tried so hard in his presentation to show that his strategic plan is working and that results are forthcoming. In my opinion it was just not convincing enough, which makes an acquisition by Staples the more appealing choice.

But before I say more about that, let's have a look at the results. The most important part of the business is Office Products and we will take a look at Q1-2008, Q1-2007 and Q4-2008:



I understand that from an operational standpoint CE is not unhappy with the results for Office Products. There was organic growth in North America, and in Australia. Unfortunately the problem with these markets is that North America is confronted with a sharply declined exchange rate for the US-dollar, and Australia seems to operate in a deflationary environment. So a shareholder, calculating in Euro's, saw a decline in revenue both compared to Q1-2007 and Q4-2008. A shareholder would also notice a declining gross margin, which means that operating results in Euro's are down. CE makes a point of reporting operating results including and excluding special items. Since however special items seem to be recurring, although the subject item is always different, the existence of special items doesn't seem so special, and are part of normal operations. An operating result of 3.8% as a percentage of sales is lower than last year and only marginally higher than Q4-2008.



Sales for Printing Systems are down. CE is pleased with the performance, since the decline should be largely attributable to orders being postponed in anticipation of DRUPA, which is the largest printing equipment exhibition in the world, that is held once every four years, and will be held in Q2 this year. A shareholder unfortunately sees declining sales and a declining gross contribution margin.



Corporate costs are in line with guidance already given by CE. There was again a significant benefit from pension assets. Although this is part of operational results, and we have been given guidance by CE for this, I would not dare to discount an uncertain benefit such as this beyond this year.

Interest costs were substantially lower than Q1-2007, which is mainly related to the sale of ASAP, which allowed a significant reduction of debt. Unfortunately there was a large negative non-cash fair value change of €12.2 million. profit tax expenses were €3.9 million, and CE expects the effective tax rate to be 20% for this year

After looking at the separate elements of the results the total picture looks like this:



This net result of €8.5 million translates in a net result per share of €0.05. It is clear that CE is focusing on organic sales, special items and fair value changes to demonstrate that results are quite encouraging, but in the end this net result is the number that is relevant for shareholders.

When I was watching and listening to the presentation I could not help but think that the main point of the exercise was to demonstrate that shareholders should not accept the offer from Staples, at least not with the current value. Quite an effort was made by CE management to show that the strategic plan is well underpinned, and can lead to the desired targets of 6% organic sales growth for the period 2006-2010 and EBITDA above 7% by 2010. They also admitted however to the US market experiencing an unhealthy market decline, and the strategy needing growing economies to be successful. Without a strong increase of the US-dollar and price increases in Australia the task seems very difficult to me.

The presentation also showed that a lot of effort still has to be made, and many things have to go right, before the mission will be accomplished. I don't think that the market is prepared to value the company on the basis of a promise of improvement, but will value the company based on actual delivery, and unfortunately delivery in Q1-2008 does not justify yet a high value based on a stand alone strategy.

For the full year 2008, CE gave guidance for revenue between €5.7-5.8 billion and an EBITDA margin of 5.6%-6.0%. This means an EBITDA amount of between €319-348 million. Depreciation and Amortization are expected to be €100 million, and interest expenses €85 million. If we add the fair value changes to this, net result before taxes would be around €122-151 million. If we take a 20% tax rate, net result would be between €98-121 million or €0.54-0.66 per share. It also means that CE will have to earn an average net result of €30 million per quarter for the remainder of the year. If we compare this with the net result of €8.5 million for this quarter that seems quite a task.

I am afraid after all this my conclusion has not changed much. I still believe shareholders should prefer an acquisition by Staples for a price above the current offer. I believe there are many risks to the strategic plan of CE, and we need much more convincing by solid quarterly results that the strategy is working. Unfortunately this takes time, and leaves room for disappointment. If I would accept the lower limit of the net result of €0.54 per share as achievable, a risk free offer now of 16 times this profit sounds quite appealing.

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Preview CE Quarter 1-2008 results

Wednesday May 7th, CE will announce their Q1-2008 results. Today we were informed about analyst expectations for these results. The average expectation of 7 analysts is an increased net result of 13% to EUR 18 million compared to EUR 15.9 million in Q1-2007. Expected revenue is EUR 1.36 billion versus EUR 1.44 billion for Q1-2007.

The analyst expectations are taking into account the divestment of ASAP in 2007, so the data are comparable to the current situation with main activities in Office Products and Printing Systems. Management of CE already gave us some guidance about revenue with this press release on April 8th, stating that organic growth for North America was 2% and for Europe 3% for the quarter. Taking into account that the average exchange rate of the EUR/USD for the results for Q1-2007 was 1.31, while it now will be around 1.50, it is not strange that a revenue decrease in Euro's is expected

I find the analyst expectations of EUR 18 million for net results very cautious. I would feel more comfortable with a revenue number above EUR 1.4 billion and a net result above EUR 20 million. Even this would still be a result that is more confirming the current sluggish situation, and would not be a strong indication of performance improvement. A EUR 18-20 million result would translate into a result per share of EUR 0.10, not exactly a number that calls for excitement about the stand alone strategy of the company. I sincerely hope that the company will give us a positive surprise on Wednesday beating these estimates. Obviously we also would be very pleased to get an update on the acquisition proposal from Staples.

Please find below the full Dutch text of the analyst expectations:

AMSTERDAM (Dow Jones)--Corporate Express meldt woensdag voorbeurs een stijging van de nettowinst van 13% tot EUR18 miljoen over het eerste kwartaal van 2008, van EUR15,9 miljoen over het eerste kwartaal van 2007. Dat is de gemiddelde verwachting van zeven door Dow Jones Nieuwsdienst geraadpleegde analisten. De omzet komt naar verwachting uit op EUR1,36 miljard tegen EUR1,44 miljard over het eerste kwartaal vorig jaar, waarbij de daling veroorzaakt zou worden door de moeilijke economische situatie in de Verenigde Staten. Analisten kijken uit naar uitspraken van het bedrijf over het ongevraagde biedingsvoorstel dat zijn Amerikaanse concurrent Staples in februari deed en naar de verwachtingen van het bedrijf voor heel 2008. Omstreeks 16.30 uur noteert het aandeel 1,2% lager op EUR7,39, terwijl de AEX onveranderd noteert. (TJW/INK)

Dow Jones Nieuwsdienst: +31 20 5890270, amsterdam@dowjones.com
(END) Dow Jones Newswires

May 05, 2008 10:34 ET (14:34 GMT)
Copyright (c) 2008 Dow Jones & Company, Inc.

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Please pay attention Mr. Ventress...

This morning we received the news that Microsoft decided not to further pursue the acquisition of Yahoo after intense talks last week, where Microsoft increased its offer with $5 billion from $29.40 to $33 per share. Yahoo management felt the offer was not acceptable. Let's watch with great interest what is going to happen with the share price of Yahoo on Monday. I certainly hope that Ron Sargent does not have to send a letter like this one from Steve Ballmer, after he has increased his offer for CE, which I am sure he is willing to do..... (end of post)

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