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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AFM notifications Staples and Halcyon

On the website of the AFM we can see that the purchase of ordinary shares by Staples has been registered. According to the information Staples purchased 22,456,115 ordinary shares, representing 9.51% of voting rights. There is also a notification from Halcyon Asset Management LLC, showing a holding of 13,389,000 shares or 5.67% of voting rights. Since only interests above 5% have to be registered, we can't tell if this interest is completely new, or if Halcyon only purchased an amount of shares that just pushed them above the minimum threshold. (end of post)

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Staples Sets Offer Price for Senior Subordinated Notes

This news release from Staples is not as exciting as news about the share related offer, but is noteworthy anyway. Since Staples wants to capture most of the enterprise value of CE, and apparently some change of control covenants exist, an offer was made on these notes. It is interesting to read that Staples has received consent from holders of 98.67% of the principal outstanding amount of the 2014 Notes and 99.33% of the 2015 Notes to make some amendments to the indentures governing the notes. I suspect that holders of convertible bonds will behave more like holders of notes than like shareholders, which would mean that if all convertible bonds are tendered, Staples would secure another 16.7 million shares, or 7.4% of total fully diluted voting rights. For the shareholders meeting on June 18, this is however not relevant, because the convertible bonds do not represent actual current voting rights. (end of post)

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CE already in talks with Staples since Tuesday

According to this Dutch article in "Het Financieele Dagblad", CE and Staples have been talking since Tuesday. It claims Peter Ventress invited Ron Sargent already on Tuesday immediately after the offer was increased and they spoke with each other almost all day on Thursday. Although it is not a real due diligence, Staples would have been provided with meaningful information. The article also states that CE regards the increased offer as a major step. Shareholders who explicitly support the Lyreco deal have not come forward yet. (end of post)

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Corporate Express enters buyout talks with Staples

CE and Staples have moved rapidly, with a spokesperson for CE confirming that the two companies already have begun discussions. In this article from AP we also learn that Lyreco CEO Eric Bigeard is still confident his deal will go through, and that he will continue communicating with shareholders in hopes of finalizing the deal, although he understands CE has agreed to talk to Staples. Further in the article an analyst gets his math wrong, when he confuses ordinary share capital with total fully diluted share capital, but you can judge that for yourself from an earlier post of today. (end of post)

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Corporate Express meets with Staples

The following press release was just issued by CE:

As previously announced Corporate Express NV, one of the world’s leading suppliers of office products, is carefully reviewing Staples’ increased offer of €9.15 per ordinary share. In this context, Corporate Express has invited Staples to enter talks in order to receive further clarification and exchange information.

I wonder what they will discuss, since the opportunity for price discussions seems over. Is CE looking for further ammunition to promote the Lyreco deal, or are they looking for an elegant way to change their recommendation? Time will tell, I guess...(end of post)

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Counting votes....

While raising the offer price for CE ordinary shares to 9.15 Euro, Staples also lowered the minimum acceptance condition from 75% of ordinary shares to 51% of the voting rights attached to the fully diluted share capital. This includes preference shares, convertible bonds and options granted. In this post I will try to determine how much potential voting rights there are, although as a disclaimer I must mention I am not an expert in these matters. Also keep in mind that the calculated voting rights for the minimum acceptance are not relevant to the available voting rights for the shareholders meeting on June 18th. A successful acquisition by Staples first needs the shareholders to vote against the Lyreco deal. Following this, the minimum acceptance condition has to be reached.

Ordinary shares

As of March 31st, there are 182,901,621 ordinary shares issued by CE, according to the offer memorandum, giving an equivalent number of voting rights.

Preference shares A

There are 53,281,979 preference shares A outstanding. These shares are subject to a special arrangement with respect to their voting rights. In the annual report of CE we can find the following:

Notwithstanding the general provision in the Articles of Association which provides that each share of capital stock is entitled to one vote, an arrangement with the Trust Office exists such that the voting rights attached to the Preference Shares A held by the Trust Office that can be exercised at a General Meeting of Shareholders are determined by reference to the value of the Preference Shares A in proportion to the value of the ordinary shares in the capital of Corporate Express. The voting right is calculated on the basis of the total value of all Preference Shares A (calculated by multiplying the number of Preference Shares A outstanding and the stock market price of one depositary receipt for such Preference Share A) divided by the stock market price of one ordinary share, both on the last trading day of the month prior to the month in which the applicable shareholders’ meeting is convened, capped at a maximum of one vote per Preference Share A.

If I use the closing prices of May 30th, my assumption is that the calculation is the following:

(53,281,979 x 3.10) / 8.47 = 19,501,078

2% Subordinated convertible bonds

CE has issued these bonds at par for a value of EUR 115 million, and they currently have a conversion price of approximately EUR 6.87. With a principal value of EUR 1,000 per bond, this gives an exchange ratio of 145.59 shares. With an amount outstanding of EUR 115 million, this is equal to 16,742,850 potential voting rights coming from the convertible bonds.

Share options

In the annual report of CE we can read that there were 2,371,896 options outstanding with an exercise price below the current offer of EUR 9.15. In 2006 and 2007 a number of 3,105,485 options were granted, but they have an exercise price of EUR 14.65 and EUR 10.08 respectively, and we can safely assume that these will not be exercised. Relevant potential voting rights from options are therefore 2,371,896.

Summary

In order to make this acquisition successful for Staples, first the Lyreco deal must be rejected at the shareholders meeting on June 18th. According to my calculations there are a maximum of 202.4 million votes available for that meeting, being the ordinary shares and preference shares. This would mean that Staples needs at least 101.2 million votes. Since they have 23.3% of ordinary shares from committed parties and their own 12.3%, this gives approximately 65.1 million shares at this moment. This means they still need about 36.1 million votes, or almost 20% of ordinary shares. If all preference shares would vote against the Lyreco transaction, this would give Staples 19.5 million shares, which would require just another 9% of ordinary shares.

This probably means that Staples still has to work hard to secure enough votes, but given my assumptions that already a significant part of ordinary shares is in the hands of speculators, their chances look good.

With respect to the next stage of declaring the offer unconditional, we have to add up all current and potential voting rights, including the convertible bonds and share options. This gives a total of 221.5 million voting rights. The amount of votes equal to 51% would be approximately 113 million, or 62% of ordinary shares. In case all preference shares, convertible bonds and options would be tendered, a total of 74.4 million ordinary shares would be required, or 41% of total outstanding ordinary shares.

In case the Lyreco transaction will be rejected by the shareholders I believe there is a very high probability that Staples will be able to secure enough votes to reach the 51% minimum condition to finalize the acquisition.

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Staples Purchased 12.3% of CE Ordinary Shares

What we suspected two days ago is already confirmed today by Staples in this news release. A percentage of 12.3% of ordinary shares was purchased by Staples, including authorization from the sellers to vote against the Lyreco deal on June 18th. This is important, because only shareholders on record on May 29th, are allowed to vote on the shareholders meeting. Just buying shares in the open market therefore does not automatically give voting rights to Staples. It is very likely more will follow. (end of post)

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Staples could start buying CE shares

Ron Sargent, the CEO of Staples spoke with the press today and indicated the company could start buying shares in CE. He did not disclose whether Staples has already been buying, but we will not be surprised if they were part of the action yesterday. There are more interesting pieces of information in this article on CNN Money. One of them is the statement by Mr. Sargent that he is not aware of the report that CE would open their books for Staples. We mentioned this in an earlier post today. "Those reports came from unconfirmed sources, unknown to us," Mr. Sargent said. (end of post)

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Ron Sargent: "A match made in heaven"

In this article on CNN Money, statements from Ron Sargent, the CEO of Staples can be found, indicating that he believes the deal is a match made in heaven at a terrific price for shareholders. He also informs us that he has no intention to acquire the CE-Lyreco combination. In the coming weeks Staples will talk to European institutional shareholders and try to convince them to back the deal. Dutch website DFT also gives us some additional information, mentioning that Ron Sargent called Peter Ventress at 1 am to inform him about the increased offer. Mr. Sargent was pleased that Mr. Ventress did not hang up on him, but promised to study the revised offer. DFT mentioned that ING is one of the institutional shareholders Staples will have discussions with. (end of post)

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Should an investor sell CE shares now?

I just wrote a column giving a short history on the acquisition process from the beginning of February until now. At the end I am making a case why investors should now sell their CE shares. Basically I am arguing that the upside of just some 2% does not compensate for the potential losses in case the acquisition fails. The current low discount to the acquisition price could indicate that Staples is a buyer at the moment, and not ordinary speculators. Unfortunately for international readers it is in Dutch, but I know that Google translate can be of assistance. The column can be read on Dutch site Beursplaza, but also here on my other blog. (end of post)

Here is the beginning of my post. And here is the rest of it.

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Corporate Express opens the door for Staples

This morning the Dutch paper "Het Financieele Dagblad" reported that CE will allow Staples access to their records, in order to perform due diligence. This was revealed by sources in and close to the company, according to the paper. The article also states that after the increased offer from Staples terms like "undervaluing" and "hostile" are no longer used, and that CE plans to give a neutral recommendation to its shareholders.
Update: Reuters also picked up on this news (end of post)

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Some comments on today's action

Today's increased offer was higher than many investors, speculators and analysts had expected. Staples was very cautious not to offer more than strictly necessary, until CE surprised all of us with the Lyreco deal. This was most likely also a surprise for Staples, causing the deal to become more expensive than otherwise would have been necessary. Many observers argued that an increase from EUR 8.00 to EUR 8.50 would probably not be enough, and that an offer of EUR 9.00 would probably convince most CE shareholders. By offering EUR 9.15 Staples apparently allowed itself an additional safety cushion. From the price action in the market today, one could start to think that this offer may do the trick for Staples. In Amsterdam CE closed below the offer price with a share price of EUR 8.93 and a volume of almost 36 million shares traded.

I have argued in another post today that I think it is possible that Staples has been a buyer today. The discount to the offer price just is too small for regular speculators, given the risk that there still is that the acquisition will fail. And because the market price is below the offer price, Staples is allowed to make purchases in the open market. Since there still is a risk that not enough shares will be submitted for the acquisition, it would be wise if Staples would take shares out of the market, to add to the already committed 23.3% of ordinary shares from several parties.

It is however likely that already many shares are in the hands of speculators who are quite willing to exchange their shares for the cash offered by Staples and have no intention to become part of the CE-Lyreco adventure. For them this increased offer is just what they had bet on. In this post I calculated that since the rumours started about an acquisition of CE by Staples, on 6 trading days alone already 129 million shares were traded. Today we added another 36 million shares to this total. If we add all the shares traded on the other trading days with an average of 3-5 million shares a day, there must be a substantial amount of ordinary shares now in the hands of speculators, ready to tender their shares, even if there was a lot of day trading activity.

My guess therefore is that Staples could be buying maybe as much as 10%-20% of ordinary shares, direct or with friendly parties, in the next few weeks, which will increase the chance of success. This may also trigger a reaction from hesitant shareholders who may abandon their preference for the Lyreco deal and also tender their shares. I have not checked the situation with preference shares yet, but will post my findings later. Given that Staples now will settle for 51% of the voting rights instead of 75% of ordinary shares, it may be important that sufficient preference shares will be tendered as well.

With respect to the shareholders circular from CE, we did not learn much more than we already learned in the previous announcement and presentation. I still believe that CE has proposed a very expensive transaction with a lot of risk for shareholder returns, as I explained in this post. Although a merger with Lyreco could make sense, CE is willing to pay too much money for the deal, just to stay out of the hands of Staples. And this will create a company with an incredible amount of goodwill on the balance sheet, and a dangerous amount of leverage. I do not see how this serves the interests of a rational investor.

Another disadvantage of the Lyreco deal in my opinion is the fact that it does not change the exposure that CE has in the US market. They will still need to fight hard in a very competitive market with very motivated competition. This will make it continuously difficult to achieve satisfactory returns for the company in a very dominant market. Obviously the acquisition by Staples takes those problems away, and exchanges considerable uncertainty for absolute certainty. With a price of EUR 9.25 per share this sounds very tempting.

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Corporate Express noted today’s announcement

Just to be complete, here is CE's reaction to the increased offer from Staples. As you can read it is very short, and chances are CE has to carefully think now about a response, since it will be difficult to dismiss this increased offer as still "significantly" undervaluing the company.

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More than 20 million shares traded in 1.5 hours

After 1.5 hours of trading, already more than 20 million shares have been traded. Theoretically this is more than 10% of total ordinary shares, and it is very likely trading will continue with high volume for the rest of the day. The big question obviously is who is buying, and who is selling. My guess would be that the sellers are speculators who are pleased with their short term profits, and who feel that the potential additional profits do not compensate for the risk of the deal collapsing, which could lead to a significant drop in the share price of CE. Obviously it is unlikely that these were shareholders with a great sense of loyalty to current CE management.

Buyers must either believe in the Staples deal or in the Lyreco deal. Since I believe that most of the price action in CE shares lately was based on speculation that Staples would increase their offer, I believe it is speculators who favour the Staples deal who are doing the buying.
The fact that the price has increased to the EUR 8.90-9.00 range is however a little confusing. These prices only reflect a discount of 1.6%-2.7% to the offer price, with about a month to go before the deal would close. These discounts look fine for a deal which has full support from both companies and has no regulatory issues, but in this case the fight is not over, and it is a hostile deal in the eyes of CE management. I suspect therefore that it is now insiders buying, who are more interested in making the deal happen than in being properly compensated for risk. The reason I think this at this stage of the game is the following text in the Staples news release:

"Staples Acquisition B.V. confirms that it shall waive the Minimum Acceptance Condition to the Offer set out in section 6.5.1 of the Offer Memorandum if and when prior to the Acceptance Closing Time there have been tendered for acceptance under the Offer such number of Ordinary Shares, including Ordinary Shares represented by ADSs, Preference Shares and Bonds that the votes attached to those securities, together with the votes attached to the same types of securities owned by Staples Acquisition B.V. and/or any of its affiliates at the Acceptance Closing Time, represent at least 51 percent of votes attached to the Ordinary Shares, including Ordinary Shares represented by ADSs, Preference Shares and Bonds issued and outstanding at the Acceptance Closing Time."

Given that the share price of CE is below the revised offer price, Staples is allowed to buy shares. With the demonstrated determination they have to acquire CE, and the lowering of the minimum acceptance condition, it seems logical that they are now an aggressive buyer of CE shares. I would not be surprised if we get a notification from the AFM in the next days showing that Staples themselves has started buying, or possibly a party friendly to the acquisition by Staples.

If however the share price increases to EUR 9.15 or beyond, I will be very surprised and confused, and will need to reconsider my line of thinking.

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Staples Increases Its Offer for Corporate Express to EUR 9.15 per Share

It doesn't get more exciting than this. Just moments after the press release from CE about the Lyreco transaction, we get this news release from Staples, raising the offer to EUR 9.15 per share, and lowering the minimum acceptance condition to 51%. I thought I would post this quickly, because we will all need some time to digest all this news. More comments will follow later.....(end of post)

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Shareholders Circular on merger with Lyreco published today

This morning CE published this press release informing us that the shareholders circular on the merger with Lyreco is published today. The Supervisory Board and the Executive Board unanimously strongly recommend that shareholders vote in favour of the transaction with Lyreco. Before doing this, I would suggest taking a look at the documents anyway. By June 12 CE will publish a position statement explaining what their opinion is on the Staples offer and why they do not recommend it to shareholders. (end of post)

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Corporate Express confirms EGM on 18 June 2008

AMSTERDAM - 29-5-2008
Corporate Express NV announces that an Extraordinary General Meeting of Shareholders (EGM) to request shareholders' approval for its intended merger with Lyreco SAS will be held on Wednesday 18 June 2008. This merger will create the leading global B2B office products supplier.
In the same meeting, the unsolicited public offer of Staples, Inc to acquire Corporate Express will be discussed. As stated before, Corporate Express is of the opinion that Staples' offer price of € 8 per ordinary share significantly undervalues the company and fails to reflect the company's potential and prospects.
The official convocation for the meeting, together with the agenda and related documents, will be published no later than 3 June. These documents will include the shareholders' circular with information about the merger with Lyreco.
The record date for the EGM is 29 May, 17:00 hrs, as published in today's Official Price List. (end of post)

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Staples continues the acquisition process of CE

Yesterday, Staples announced that they commenced the cash tender for certain CE notes. There is nothing special about this announcement, besides the fact that Staples seems to continue the process as if nothing has changed. But then again, why shouldn't they continue like this, since we appear to have landed in some sort of high stakes poker game. By continuing the process this way, Staples can test the reaction of the market. There is no real need to change anything about the offer or the offer price of EUR 8.00 per share in the next three weeks, so why not try to influence the speculators to see what happens.

We should not forget that since the first announcement of the offer, many shares have changed hands, and I assume most ended up in the hands of speculators who have no interest in the long term prospects of CE, but are only interested in making a quick buck, or Euro in this case. We can be totally unscientific and try to estimate how many shares have landed in the hands of speculators since February 19th

If I assume that a on a normal day, an average volume of shares is traded of about 3-5 million, we can identify the high volume days, of let's say more than 10 million shares traded. These days were in the beginning of February when speculation about an offer started (24 mln), February 19th and 20th when the offer was announced (54 mln), March 17th when the market was worried Staples would not continue (12 mln), May 13th when Staples announced the offer would be increased to EUR 8.00 per share (14 mln), and finally May 21th when the merger announcement between CE and Lyreco came out (25 million). This is a total of 129 million shares traded in just 6 trading days. It is anyones guess how many of these trades were just short term round trips by day trading speculators, but assuming that a reasonable percentage of 30% of these shares traded, ended up in the hands of patient speculators, this would be about 39 million shares, or more than 20% of the ordinary share capital of CE. Given that in most other trading days, speculators would also have been buying, I am comfortable with this estimate and the true number could maybe be as high as twice this percentage in my opinion.

A percentage between 20% and 40% will matter, because it means that in addressing the shareholders, both Mr. Ventress and Mr. Sargent have to appeal to investors and speculators, and these two groups of shareholders have a completely different agenda. So in the next weeks, both these gentlemen have to play it cool, where certainly Staples will need to find out if it makes sense to raise the offer, and if this does make sense, how much is required to win the game.

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The evening of the day after....

Today was a very quiet day with respect to CE, compared to the launch of the offer from Staples to buy the company just a couple of days ago, which was rapidly followed by a trick of CE themselves, namely the proposed merger with the French company Lyreco. After the announcement yesterday, shares of CE initially dropped about 8% to EUR 7.44, but recovered during the day to a level of EUR 7.99, just 1.5% below the previous day close with a volume of more than 25 million shares traded. Today was a remarkable day with the share price ending at a level of EUR 8.21, which is well above the offer from Staples. Volume with 9 million shares was also again strong. Like many others, I am very curious to see where this will eventually lead to, and it sure is interesting to speculate about it.

I believe very strongly that today's price moves were not caused by investors who think the Lyreco merger is a great deal. I rather think that it is caused by speculators betting on a last increase of the offer price by Staples to convince CE shareholders that an increased offer is superior to the merger with Lyreco, which may be only mildly superior to the execution of the stand alone strategy of CE.

Staples must surely be very surprised, like most of us, that CE was able to bring this deal to the table. Staples should however take part of the blame for allowing this to happen. The company smelled a bargain, when CE was really brought to extremely low share price levels, and took those low levels as the base line for their offer. It is no wonder this left many long term CE investors, who would have bought at levels of at least EUR 10 per share and more, insulted and reluctant to accept an offer that would lock in a substantial loss position for them.

CE must have surely been desperate to accept the deal with Lyreco at these conditions. I am willing to accept that CE and Lyreco were already talking for many months about a possible merger. But come on, you are paying 19 times 2007 net income and giving away the top job, and you call that a great deal? The deal was put together this way, because management of CE wants to block an acquisition by Staples. At a valuation well below the EUR 1,731 million price tag, I could have accepted this as a sensible deal for CE shareholders, but now I believe they would just go from one promise for the future to the next promise for the future.

In a nutshell, CE may get into a situation where they will incur initially additional finance costs of EUR 70 million a year, and get net synergies of negative EUR 12 million in the first year, EUR 48 million in the second year, and EUR 80 million in the third year. Only in year 4, which is 2012, the full annual benefits of EUR 100 million are expected. The additional profits still have to come from EBITDA margin increases and sales growth, just like in the strategic plan. The higher profitability of Lyreco may bring an instant higher margin and net income, but unfortunately this higher net result also has to be shared with 102.5 million new shares.

I am not able to see that a merger at these conditions is a master stroke by Mr. Ventress, although it could end up unintentionally creating more value for CE shareholders through an increased offer by Staples. If Mr. Ventress wants to take credit for that later, that's fine with me.

Lyreco is surely the smart party, until now, in this story. The situation with Staples allowed them to leverage their negotiation position, and get a lot more value and power out of this deal than would have otherwise been possible. Just imagine a possible alternative, where Lyreco would have had to speak with Mr. Buffett on his European tour. He would have been impressed with the company and may have offered them maybe 12 times 2007 net income in cash on the spot. No, this situation is much better for Lyreco, and the story may not even have ended yet for them, having shown that they are willing to be acquired.

While market participants will be pondering the merits of the merger with Lyreco, Staples must also be considering what their next move should be. It seems clear that the EUR 8.00 offer is dead. Even if it would be superior value for CE shareholders, they now have an alternative, that may be good enough reason for them to decline the offer from Staples. This can not be a pleasant outcome for Staples, unless they believe CE and Lyreco will screw up the merger and future years ambitions. In my opinion, Staples could and should consider raising the offer to a level where CE shareholders feel it is the safer bet, and gives them a better feeling about sharing the potential synergies of the acquisition by Staples. A raise to a level of EUR 8.50 may not do the trick anymore. Just consider if Staples would offer EUR 9.00 per share, which would be an increase of about $290 million, or about $ 0.40 per Staples share. Surely this will not be the biggest obstacle. Even a higher price would not be such a big deal, but I will not speculate further about the wisdom of Staples in setting an increased offer price.

If Staples can still acquire CE, and effectively block the merger with Lyreco, there may be another added advantage, being the fact that apparently Lyreco is willing to be purchased (in case Staples didn't know this already). This does not have to happen immediately, but at least the purchase price can be brought to more sensible levels, and given some time, Staples could probably pay in cash as well, or could consider issuing shares to finance a deal.

Staples could also be really bold, and block the merger with Lyreco by acquiring CE, and immediately renegotiate the terms of the merger with Lyreco, and make it a Staples/CE/Lyreco combination. That sounds like a perfect end game, but I am probably getting carried away now......

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Staples is considering all options

The initial reaction from Staples just came out. Not very surprising, and very short:

Staples, Inc. Acknowledges The Corporate Express N.V. Proposed Acquisition Of Lyreco SAS

FRAMINGHAM, Mass.--(BUSINESS WIRE)--May 21, 2008--In light of today's news about the proposed Corporate Express N.V. acquisition of Lyreco SAS, Staples, Inc.(Nasdaq: SPLS) and Staples Acquisition B.V. are considering all options.

Staples Acquisition reaffirms that its all cash offer of EUR 8.00 per ordinary share delivers certain, immediate and superior value to Corporate Express shareholders. Staples Acquisition's offer does so without the substantial execution and other risks inherent in Corporate Express' long-term plans, with or without the addition of Lyreco. (end of post)

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A tip for Ron Sargent

The proposed merger of CE with Lyreco, could turn out to become an ever bigger and better price for Staples. Obviously Staples will have to pay more, but arguably they get a better company in return. If Staples would indicate that they are willing to pay EUR 9.00 per share for either CE stand alone or the merged company with Lyreco, it would create instant additional value for the Lyreco shareholders of EUR 100 million. If Staples would include the vendor note in the all cash offer, it would be even better for Lyreco shareholders, because they would generate about EUR 440 million additional immediate cash from the deal. Where the services of Mr. Ventress would probably not be required anymore after the acquisition, it may make sense for Mr. Sargent to offer Mr. Bigeard a position in the board of Staples. That would make a revised offer by Staples even more appealing to Lyreco...(end of post)

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Some comments on the merger with Lyreco

This morning CE surprised most of us, if not all of us with the announcement of the proposed merger with Lyreco, a French private company. CE claims the merger has nothing to do with the offer from Staples, and would have also been announced without the offer from Staples. This may be true, but from the valuation of Lyreco, I do get the impression this was a defensive move to prevent the acquisition by Staples. Without the offer from Staples, CE most likely would have been able to negotiate a better deal. Having looked at the presentation from CE, I am not impressed with the advantages of this deal over the stand alone strategy. In the first 3 years, the net synergy, after integration costs only increases slowly, while CE will incur a substantial increase in financing costs, and a substantial increase of goodwill on the balance sheet.

Purchase price for Lyreco

The purchase price for Lyreco consists of 102.5 million shares, cash of EUR 560 million and a Vendor Loan Note of EUR 340 million. Thanks to the offer from Staples the shares are valued at EUR 8.11, making the value of the total consideration EUR 1,731 million, which is 9.6 times 2007 EBITDA. With EBITDA for CE in 2007 of EUR 298 million CE was valued at 5 times EBITDA. Before the offer from Staples, with a share price of EUR 5.50 this was only 3.4 times. This indicates that CE was willing to pay quite a lot for Lyreco. Maybe the fact that Mr. Eric Bigeard, the current CEO of Lyreco, becomes CEO of CE confirms their superior management capabilities. If this would not be the case, the conclusion must be that the threat of an acquisition by Staples has driven CE to pay a high price for Lyreco.

Post acquisition balance sheet

I think I am starting to understand the composition of the balance sheets of both companies, so it will be interesting to make an attempt to see what the post-acquisition balance sheet looks like. Following statements made by CE that the deal will close in Q4 this year, I simplified my assumptions and assume that the deal will close on December 31th. We have a balance sheet for CE for Q1-2008 and in the presentation by CE and Lyreco, a balance sheet for Lyreco for December 31th, 2007 was included. Based on the guidance given by CE and my own assumptions, the picture would look something like this:



I have made a calculation of the results for the full year 2008, and added the value to both equity and current assets. The exact way I have looked at results will follow later. This leads to balance sheets for both companies at the and 0f 2008. Following this calculation the transaction has to be executed. CE needs to pay the agreed consideration to Lyreco shareholders and will assume all assets and liabilities. The difference will go to goodwill.

And this part looks a bit scary to me. The equity value of Lyreco at the end of 2008 will be EUR 548 million. This means CE will pay a goodwill of close to EUR 1.2 billion for this acquisition. Taking into account the EUR 210 million already on the balance sheet of Lyreco as intangible assets, CE will have close to EUR 2.8 billion of intangible assets on its balance sheet, with an equity value of EUR 2.4 billion. No wonder the vendor note was issued at conditions that allows CE to qualify it as equity, and no wonder they intend to pay down debt and strengthen equity in the coming years!

Results until 2011

Guidance for 2011 is a revenue of at least EUR 9.5 billion for the combined company, with an EBITDA margin of 8% before synergy effects and 9% including synergy effects. Given that the CE guidance was 7% EBITDA in 2011, the amount of 8% for the combined company seems too high. The following table can illustrate this:



It seems very strange that Lyreco would be able to achieve an EBITDA percentage of 10.5% in 2011. This was also noticed by an analyst at the conference call today, who aksed the question to the CFO of CE. He did not have an answer and thought this margin to be unlikely, so I will assume this is just an error.

I will attempt to determine the results for CE and Lyreco on a stand alone basis for 2008 and 2011, based on the given guidance and historical information that can be found in the presentation. To be on the cautious side I took the more conservative guidance from CE as a starting point. To my surprise the conclusion is that the costs for financing this acquisition are so high, that it takes away a big chunk of the synergy effects. With a calculated net result for CE shareholders of EUR 1.10 per share in 2011, the combined company with Lyreco only leads to a net result per share of EUR 1.22. I could be completely wrong of course so let's go through the calculations:



I am not uncomfortable with an estimate of EUR 0.50 per share for CE in 2008, which is at the low end of the guidance given by CE. The net result for Lyreco is calculated with the EBITDA amount of EUR 201 million that can be found from the guidance by CE. From the presentation we can see that Lyreco has been investing in all 5 previous years, and I assumed an annual depreciation charge of EUR 22 million. With the assumption of some exceptional items this gives an operating result of EUR 175 million. Since debt is almost non-existent and the effective tax rate has been quite high for Lyreco, a net result of EUR 105 million follows. The available data showed some adjustments for minority interest in 2007, which I continued in 2008, leading to a net result of EUR 99 million as an estimate for 2008. The combined result of EUR 0.67 per share is obviously completely overstated, since it does not take into account the financing costs CE would have incurred to get the net result of Lyreco.

For 2011 the same logic has been applied, working towards the margin guidance from CE, corrected for what I believe is an overstatement of the Lyreco margin in 2011. For CE an effective tax rate of 25% has been assumed in 2011, and for the combined company the financing costs relating to the acquisition have been taken into account. To reduce these costs, I have assumed that CE will decrease debt by EUR 100 million a year until 2011.

With respect to the synergy effects and integration costs, I have assumed they are after tax effects and will take place in the years 2009-2011. This means that positive synergy effects are EUR 28 million, EUR 68 million and EUR 100 million in those years, while the integration costs are EUR 40 million in 2009, and EUR 20 million in 2010 and 2011 each.

So after all these assumptions a net result of EUR 1.15 follows for 2011, based on the low end of the guidance of CE. For 2009, a net result per share can be calculated of EUR 0.49 and for 2009 net result per share would be EUR 0.88. From 2012 onwards the full effect of the merger should be visible in the results.

Shareholders of CE are now confronted with three choices. The offer from Staples can be accepted, the merger can be approved, or both previous possibilities can be declined. These choices are not easy. I am very worried about the merger with Lyreco. I believe there is a lot of risk in the strategic plan, and the merger will not make things easier, although I have full confidence that Lyreco is a strong company. Again results are pushed further to the future, with 2012 probably being the first stable and fully integrated year.
Although I remarked half jokingly in another post that Staples should just bid for the combined company, I am not sure that this would be appealing for Staples after considering the above calculations.

With an offer of EUR 8.00 per share from Staples, there is a serious chance that shareholders will have a preference for the uncertainty of the merger with Lyreco, which means that Staples now has to ask themselves how badly they want CE. In the current situation, the best thing that could happen to CE shareholders is an increased offer from Staples, to a level that makes them realize the risk of the proposed merger by CE with Lyreco. It probably means that Staples has one more chance to convince CE shareholders, or should now just move on.

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Corporate Express merges with Lyreco

Amazing and surprising news just published by CE:

"Corporate Express NV and Lyreco SAS announced today that they entered into a transaction, subject to shareholders’ approval, to combine both companies to create the undisputed leading global office products supplier focused purely on the business to business (B2B) market. The combination will benefit from a shared vision on industry and strategy, major economies of scale, a well-balanced international presence and customer mix." (end of post)

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Comments on launch of public offer by Staples

Yesterday, Staples launched the offer for the acquisition of Corporate Express with an offer of EUR 8.00 per ordinary share. Shareholders can submit their shares until June 27th. Staples also made an offer for Corporate Express’ preference shares and subordinated convertible bonds due 2010. The most important condition for making the offer unconditional is acceptance of at least 75% of ordinary shares.

This acquisition process is at a peculiar stage, with both parties not negotiating with each other and accusing the other party of unwillingness to do so. For shareholders this is a very unfortunate situation, with a real possibility of a failed offer, and therefore a missed opportunity to create significant shareholder value for shareholders of both companies. However, based on the current offer we can try to evaluate the current situation from the perspective of both companies and their shareholders

Corporate Express shareholders have a choice to accept the offer or to allow management to continue with the execution of the strategic plan 2008-2010. With the presentation of the results for the first quarter of 2008, we were given some insight in the ambitions that Corporate Express has set for itself.

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

The strategic plan calls for a 6% average annual organic growth rate for the period 2008-2010 and an EBITDA margin of at least 7% by 2010. Based on the current progress and the stated ambitions, Corporate Express believes revenue of EUR 6.8 billion is achievable for 2011 with an EBITDA of EUR 475 million. With depreciation and amortization increasing in line with sales, and finance costs assumed to stay constant, this would imply a result before taxes of around EUR 275 million. With an effective tax rate of 25%, this should lead to a net result of EUR 206 million, or EUR 1.13 per share for the year 2011. If market conditions are favorable for stocks by the time such results are announced in 2012, this could well mean a value of around EUR 16.00 per share. Declining the offer and allowing the company to achieve its plans, would potentially create value twice the value of the offer of EUR 8.00 made by Staples, after a period of 4 years. This would imply an annualized return of almost 19%, which is by all means attractive.

Success of the strategy is however not at all guaranteed, and there is plenty of risk in the execution of the strategy. Ron Sargent, the CEO of Staples, makes the risk of failure of the strategy one of the key reasons why Corporate Express shareholders should accept his offer, when he states in the offer memorandum: “I firmly believe that our offer of EUR 8.00 per share delivers superior value to Corporate Express shareholders, and does so without the risks found in Corporate Express’ long-term business plan. Rather than the uncertainty of potential value for your investment, our offer provides shareholders with the certainty of realizing immediate and premium value for your investment.”

There are indeed risks that may prevent Corporate Express from reaching its targets. If the company only reaches 80% of its ambitions by 2011, which would still be a reasonable accomplishment, net income per share would be somewhere around EUR 0.90, and with a likely lower P/E ratio, the stock price could be around EUR 11.00. Compared to the offer of EUR 8.00, this would only give an annualized return of 8%, and makes the offer from Staples much more attractive.

It is possible that investors will perceive the risks associated with the stand alone strategy of Corporate Express quite high. This may cause the share price to drop significantly following a potential breakdown of the acquisition.

From the perspective of Staples the picture looks completely different. The company sees a target that can add significant value. Besides the strategic fit, they undoubtedly see potential for cost savings and further synergies. If the added value from the acquisition is estimated to be a modest EUR 100 million a year, and the estimated low end net result for Corporate Express in 2008 is EUR 122 million, Staples would add 222 million to its annual results. In US-dollars this is about $350 million. Since the purchase of Corporate Express ordinary shares would be financed with debt, there could be an additional interest cost of around $140 million, or around $100 million after tax. This would mean an additional net annual result from the acquisition of $250 million, which is almost 25% of Staples’ net result for 2007.

With a P/E ratio currently at 17, it is very likely the market has already priced some of the advantages of the acquisition into the share price. Because of the acquisition of Corporate Express, there will be a significant level of debt on the balance sheet of Staples, and this may also have some effect on the P/E ratio. However, one could argue that the post acquisition share price of Staples could be about $5.00 per share higher than the share price would be without the acquisition, based on reasonable and achievable synergy targets that do not seem to be too stretched.

At this moment we find ourselves in a situation where the companies do not engage in serious talks and the offer is considered hostile by Corporate Express. They state that the offer does not do justice to the real value of the company, and undoubtedly they believe a higher share of the synergy effects should be priced into the offer. Staples believes they are paying a considerable premium over the share price of Corporate Express prior to the date the offer was made, and they will surely feel it is them who are creating the synergy effects and should receive full value for them. A recurring net synergy effect of EUR 100 million could have a market value for Staples of up to EUR 1.5 billion, which would be around EUR 8.00 per Corporate Express share. Assuming this is a reasonable estimate, Staples is offering EUR 2.50 of this value to Corporate Express considering an offer of EUR 8.00 per share and a share price of EUR 5.50 before the offer was made.

Both companies are now in a situation where they need to make this offer succeed. For the management of Corporate Express, the pressure would be tremendous for the coming years to make good on the promises of the strategic plan, while Staples shareholders are already starting to anticipate the benefits of the acquisition. If the deal collapses, because Corporate Express shareholders refuse the current offer, both parties lose. It is also understandable that Staples does not want to change its course of action, without a willing negotiation partner.

A negotiated and agreed final offer would probably identify many tangible synergy effects and would allow an integration plan to be implemented swiftly. I have no doubt that such a negotiated final offer could be higher than the current offer. Unfortunately this requires two parties who are willing to engage. The signals we are getting from both parties are not encouraging, and put a lot more uncertainty on the final outcome of this acquisition attempt. In today’s earnings conference call, Ron Sargent expressed his frustration with the unwillingness of Corporate Express to negotiate and allow due diligence. He also stated that if Corporate Express shareholders reject the current offer, Staples would move on. I am willing to believe that this is almost true, since there is still the opportunity to raise the offer one more time with the extension of the acceptance period.

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Staples Launches Public Offer of EUR 8.00 per Share

Staples just released the news that the offer for the ordinary shares of CE will be launched on Tuesday May 20th en will end, subject to extension, on Friday June 27th. The Dutch AFM already approved the offer memorandum, and Staples is moving ahead. The offer also includes the preference shares and convertible bonds. There is a special section on the Staples website with all relevant information.
Update: For the record, the initial, and predictable reaction from CE (end of post)

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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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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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