EU inquiry deadline June 17

I can't say it better than the news release:

BRUSSELS (Thomson Financial) - The European Commission said the deadline for its inquiry into office product supplier Staples Inc.'s $2.47 billion or 8.00 euros per share hostile takeover bid for Netherlands-based rival Corporate Express NV. is set for June 17.
Corporate Express rejected this raised offer last week.
The transaction will be reviewed under the EU's 'simplified' merger review procedure for cases which the commission believes does not pose competition concerns.
nina.chestney@thomsonreuters.com nc/sal (end of post)

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Centaurus reports 5.16% holding in CE

I just saw the notification by Centaurus Alpha Master Fund Limited to the AFM of a 5.16% interest in CE, through a holding of 12.2 million shares. I am a little confused by this, since there is also a notification from Centaurus Capital Limited dated June 7th, 2007 with a holding of 5.02% voting rights, which equals 11.8 million shares. I am not completely sure if this is an additional interest or just a change in position. The voting rights increase would not have required a notification, since the position stays just above the 5% reporting threshold, but maybe the change in capital interest did require a notification. I'll try to find out more, but if anyone knows, please share it with all of us.
Update: Reuters reports that CE has stated that the notification is a technical adjustment. (end of post)

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Analyst upgrades Staples

On several websites like MSN Money, Forbes and Reuters we can read that Staples has been upgraded to "buy" from "hold" by Jefferies & Co. analyst Daniel Binder, with a price target of $28. It seems the recommendation is mainly based on the possible acquisition of CE, which could add $0.60 to earnings per share. Mr. Binder joins us in speculation about the final price and he believes the price may have to be raised to EUR 8.50. Let's do some math:

Currently Staples has about 701.7 million shares outstanding, so an increase of $0.60 would be an increased net result of $421 million, or EUR 270 million. Since CE had a net income of EUR 178 million in 2007, which included a gain of EUR 106 million from discontinued operations, Mr. Binder sees a synergy effect of almost EUR 200 million. This translates in a synergy effect of EUR 1.09 per CE share! Including the results from continuing operations, Staples would be buying an additional net result of EUR 1.48 per CE share. Of course they would argue that they are creating a big chunk of this value. If my interpretation of Mr. Binders' assumptions are correct, buying CE for a price of EUR 8.50 would be an extraordinary bargain for Staples, certainly given the P/E ratio of almost 17 that Staples is currently trading at.

I have done the math quite quickly, so please correct me if I am wrong. Otherwise I assume that either Mr. Binder is very optimistic about the synergy effects of this deal, or otherwise Staples is trying to keep a lot of value for themselves.

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CE declines Staples’ announced offer price

In this press release, you can read the formal refusal from the management and supervisory board of CE of the revised offer from Staples. Mr. Ventress is writing directly to Ron Sargent to express his dissatisfaction with the offer. The refusal leaves the door for negotiations wide open, and is not at all anymore about preferring a stand alone strategy, although reference is made to the strategic plan, but only to serve as a value enhancer.

I think Mr. Ventress is exaggerating a little bit with respect to his perceived value, but in his position he should. He wants a better reflection of ongoing operating value, recognition of the strategic plan, and he wants a bigger slice of the synergies. Mr. Ventress says that these synergies will be significant, and feels he gets none of them in the current offer. The question is what each party is using as a baseline and what the level of the synergies is they will be arguing about

At the moment the offer was made, CE was trading at around EUR 5.50 per share, which I am sure Mr. Ventress felt was too low. Also based on his interpretation of the Q1 results he may feel a higher stand alone value, closer to the current offer price, should be used as a baseline. Staples believes the base line value for CE should be somewhere between EUR 4.32 and EUR 5.43.

With respect to synergies, I would not be surprised if Staples sees synergy effects that could easily be valued at EUR 5.00 per share. An annual saving of about EUR 100 million after taxes would already create such a value, and this does not sound like a stretched target.

So my guess is that the negotiations will be about a synergy effect of about EUR 5.00 per share and the base line value for CE. If Mr. Ventress can make a convincing case for the justification of a higher stand alone value, and can identify the significant synergies that he himself also sees, he may be able to convince Staples to a better deal, which in that case could be friendly and swift. This must have some value for Staples.

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Staples already had contact with shareholders CE

Here is an interesting piece of news in Dutch from Betten Financial News. Basically the article mentions comments made by Mr. Paul Capelli, spokesperson of Staples, who states that Staples has been in contact with shareholders in order to get their opinion about the initial offer. These conversations have resulted in the current offer. The rest of the article talks about comments from both CE and Staples that it is the other party that did not want to talk until now. I am pretty sure that talks will now take place soon. If the above is true, I think that Mr. Ventress has to work quite hard to get an additional EUR 0.50, and even harder to get more. (end of post)

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Corporate Express reaction to Staples' filing announcement

Following the increased offer from Staples, CE issued this reaction. The reaction can be regarded as positive, since CE management indicates that it is now ready to talk, or in their words is "available to engage in a dialogue with Staples and if appropriate will meet with Staples management to allow them to elaborate on the revised proposal." The CEO of CE, Mr. Ventress is quoted as saying: "We are willing to have discussions with Staples and clearly this still applies also on the basis of today’s announcement.”

Shares of CE are currently trading at EUR 8.10, which is 6.5% above yesterday's closing. Investors are actively agreeing with CE that the offer is too low, and should be further increased. This may give Mr. Ventress some encouragement in his forthcoming discussions with Staples.

The best scenario would obviously be if Staples and CE come to an agreement while the offer memorandum is under review by the AFM. This will allow Staples to make the formal offer to the public with a revised and increased final price, that has been agreed with CE management. This would also mean that both companies can start working on the integration plan in order to capture all the possible synergies from this acquisition.

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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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