Office Depot is hoping to pivot its brick-and-mortar store business model toward the IT services space by acquiring systems integrator CompuCom. In the wake of its $1 billion planned acquisition of CompuCom, investors aren't holding on to their shares and waiting for growth.
Office Depot’s stock price dropped nearly 19 percent in early trading on Wednesday, recovering slightly as the day wore on. The stock was down $0.74 (16.01%) to $3.86 at 2:50 p.m. ET.
Analysts attributed the stock drop to a combination of the CompuCom deal and the company lowering its guidance for the 2017 fiscal year. The retailer anticipates operating income of $400 million to 425 million, down from $500 million, listing weaker-than-anticipated store sales, higher supply chain costs and the effects of three major hurricanes in Texas, Florida and Puerto Rico as influencing factors.
The market capitalization for Office Depot has fallen from $2.38 billion to $2.02 billion since Tuesday. The retailer possessed a market valuation of more than $3.1 billion on Aug. 8, when it missed the mark on projected second-quarter profits by a significant margin.
Martin Wolf, president of martinwolf M&A Advisors, told CRN that the decline in Office Depot's share price should be viewed as a combination of investor reaction to the CompuCom deal and the company's disappointing financial performance in 2017.
"To say it's because of the acquisition specifically, you can have an opinion, but that's not fact-based," Wolf said.
Office Depot also indicated that third quarter sales were down 7 to 8 percent, with adjusted operating income of $125 million to 135 million for the quarter.
Office Depot projects the CompuCom acquisition will be accretive within the first year of deal completion, which will also create an estimated $40 million in annual cost synergies between the two companies within two years. The acquisition adds revenue of about $1.1 billion to Office Depot's business portfolio.
"CompuCom's business has changed over time. But they have a big robust services business, and that's interesting," Wolf said. "Any transaction has risks. They're clearly identified. And if they execute well, they'll be fine."
To finance the deal, Office Depot is relying on new debt and an issuance of 45 million common shares to Thomas H. Lee Partners, the private equity firm that owned CompuCom before Wednesday's sale. Thomas Lee will hold an 8 percent equity position in Office Depot.
Jeremy Bowman of investor discussion website The Motley Fool likened the CompuCom acquisition to Best Buy's 2002 purchase of Geek Squad but added that trying to expand into IT services was a better option than maintaining course in a widely-struggling retail market.
"With office supply retail crumbling and its merger with Staples blocked, Office Depot must do something to maintain its relevance. Even if doesn't save the company, the CompuCom deal is better than simply treading water in a declining industry," Bowman wrote.