October 4, 2017

Office Depot + CompuCom: Taking Care of Business?

Yesterday, Office Depot took the first step of transforming into a business services and technology products company by acquiring CompuCom. CompuCom is a market leader in providing end-to-end managed IT services, products, and solutions that enable the digital workplace for enterprise and SMB customers. Office Depot acquired CompuCom from private equity firm Thomas H. Lee Partners for total consideration of approximately $1 billion, including repayment of debt and an 8% equity position in Office Depot. The transaction value translates to 0.9x CompuCom’s revenue (which is almost double the multiple at which Thomas H. Lee Partners invested less than five years ago) and 14.5x EBITDA. The deal is the latest in a more than decade-long series of private equity ownership changes for CompuCom; the company was taken private when Platinum Equity bought it in 2004, traded to Court Square Capital Partners in 2007, and was sold to Thomas H. Lee Partners in 2013.

The transaction represents a turning point for Office Depot, which has been struggling amid a broader decline in the brick & mortar retail sector. The retailer’s same-stores sales have declined for the past six quarters. And a year ago the Federal Trade Commission squashed competing office supply retailer Staples’ offer to acquire Office Depot for $6 billion.1 With the CompuCom acquisition, Office Depot aims to reverse its misfortunes by pivoting towards selling technology services, which Gerry Smith, CEO of Office Depot, calls, “the office supply of the future.” The acquisition immediately positions Office Depot as a powerful, omnichannel technology services provider by adding $1.1 billion in incremental B2B IT services revenue.

From a financial perspective the deal sets Office Depot up for success, assuming the retailer can extract the advertised revenue and cost synergies. On the revenue side, acquiring CompuCom diversifies Office Depot’s revenue mix into higher-value, recurring IT services. After the deal, retail will contribute less than 50% to Office Depot’s total revenue. Additionally, CompuCom’s established Tech-Zone offering targeting SMB customers will be placed within Office Depot’s national footprint of retail stores, which will help drive foot traffic. Selling these services in-store will open up the door for Office Depot to offer customers additional services and products (e.g. copy & print, furniture design, and office supplies). On the cost side, the deal is expected to save the combined companies $40 million within two years.

Clearsight believes acquiring CompuCom will present Office Depot with an intriguing growth opportunity even though shareholders’ initial reaction to the deal is resoundingly pessimistic. Office Depot stock traded down 10% in after-hours trading after the deal (which is expected to be accretive) was announced. But the company simultaneously dropped it’s guidance for operating income by $100 million, making it hard to divine shareholder reception of the combination. We expect that with the added physical presence in Office Depot locations, CompuCom’s 6,000+ salaried technicians will be able to tackle a growing market with renewed vigor. Acquiring CompuCom gives Office Depot a roughly 3% share of the highly fragmented, $25 billion market for managed IT services. We’ll be watching closely to see how Office Depot pursues this market with the strategy of integrating business services into an omnichannel sales platform.

1Staples later managed to be acquired in June 2017 by private equity firm Sycamore Partners for $6.9 billion. As recently as July 2017, news outlets reported that Staples privately held talks to spin off its retail arm to Office Depot. Those plans are likely in question with Office Depot’s newly announced focus on becoming a technology services provider.