Office Depot Inc. is following a road increasingly traveled by major office supplies companies with yesterday’s announcement that it plans to shift the company from a traditional office products retailer to a broader business services and technology products company. That change in strategy is tied to Office Depot’s agreement yesterday to pay $1 billion for CompuCom Systems Inc., a provider of I.T. services and products to enterprise, small and midsize businesses.
“Technology is the office supply of the future,” says Gerry Smith, CEO of Office Depot. “The combination of CompuCom’s enterprise I.T. services with our millions of customers and approximately 1,400 distribution points gives us the credibility and scale to build a sustainable platform and stand apart from the competition.”
The move follows by two months Staples Inc.’s declaration it would separate the U.S. and Canada retail chains from its North American Delivery unit, which would operate primarily as a seller of office supplies and other products to businesses. Staples is No. 22 in the B2B E-Commerce 300 and Office Depot No. 42.
CompuCom provides managed I.T. services to businesses with more than 5.1 million unique end users and has about 6,000 licensed technicians who provide remote and onsite technology support, Office Depot said in a statement. CompuCom procures, installs and manages hardware and software for businesses, and offers I.T. support services including remote help desk, data centers and on-site technicians.
CompuCom customers currently access services and technology through its internet client portal. In addition to online access through Office Depot’s B2B e-commerce site, small and midsized business clients will be able to access CompuCom’s Tech-Zone I.T. services, which will be located in Office Depot stores nationally.
“The workplace has truly moved to a digital environment with the average worker having over four connected devices,” CompuCom CEO Dan Stone says. “Office Depot’s established brand and large national footprint will help to drive the expansion of our offerings to more markets.”
Office Depot says it expects the transaction to add about $1.1 billion of annual revenue, provide cost savings of more than $40 million within two years and gain “substantial” revenue from CompuCom’s access to Office Depot’s multichannel customer base.
Under the terms of the agreement, Office Depot will acquire CompuCom from Thomas H. Lee Partners L.P., a private equity firm. The $1 billion price tag includes repayment of CompuCom debt and issuance of new Office Depot shares. Following the transaction, Thomas H. Lee Partners will hold an equity position in Office Depot of approximately 8% of total shares outstanding.
Office Depot will finance the acquisition with new debt and the issuance of approximately 45 million shares of its common stock to Thomas H. Lee Partners. Office Depot says it will refinance CompuCom’s existing debt with a new loan of approximately $750 million.
The transaction is expected to close by the end of the year.
Goldman Sachs & Co. LLC is financial advisor to Office Depot and Wachtell, Lipton, Rosen & Katz is legal counsel. Weil Gotshal & Manges LLP is legal counsel to CompuCom.
Office Depot also announced yesterday a revised Q3 financial outlook that includes an overall 7% to 8% decline in total sales and a 5% to 6% drop in comparable-store sales. The company cited a number of conditions affecting sales, including damage from recent hurricanes in Texas, Florida and Puerto Rico, where a significant portion of its retail and Business Solutions Division customers are located; a decline in sales and store traffic during the back-to-school sales period; and higher supply chain transition costs related to planned consolidation of vendors and warehouses.
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