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.