Ventress plays his hand

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The stakes are raised in the battle for Corporate Express as CEO Peter Ventress pulls an ace from his sleeve.
Had this publication gone to press two days sooner, you would probably be reading how Staples was moving inexorably towards its planned takeover of Corporate Express for a bargain basement price of between €8-€8.50 ($12.56-$13.35) per share.
On 12 May the US giant had raised its initial €7.25 offer to €8.00, and while Corporate Express still rejected this price, there were signs that it was resigning itself to its fate: gone from the prepared statement was the assertion that the best interests of Corporate Express’ shareholders lay in its stand-alone strategy, to be replaced by an apparent willingness to come to the negotiating table.
We were still subjected to the "this offer substantially undervalues the company and its prospects" line, but surely this was just posturing in an attempt to squeeze the best price out of Staples, just as any board acting in the best interests of its shareholders would do.
Unsurprisingly, a similar response was forthcoming after Staples formally launched its hostile bid on 19 May, taking its offer directly to Corporate Express’ shareholders after noting an "unwillingness" on the part of the Dutch company’s management team to negotiate, apparently after a phone call between Ron Sargent and Peter Ventress on the 16th had failed to resolve certain issues.
Now Corporate Express’ shareholders have until 27 June to tender their shares and the financial markets were in unanimity that they would take Staples’ cash (albeit after an improved offer somewhere around the €8.70 mark) rather than put their faith in Ventress’ stand-alone strategic plan which, even though there were signs of an improvement, looked way too ambitious given the current economic backdrop.
What no-one had expected was the bombshell that arrived on 20 May, less than 48 hours after Staples’ hostile bid had been announced. Corporate Express had said that it would "make a further announcement in due course", but little did we know that this would be the agreement between Lyreco and Corporate Express that the two companies had agreed to merge creating a new organisation with sales of €8 billion, the world’s largest purely B2B office supplier.
"I was flabbergasted," admitted Martijn de Drijvers, analyst at Amsterdam-based firm SNS Securities.
"This move has taken the financial markets completely by surprise."
The agreement sees Corporate Express acquiring 100 percent of Lyreco in a transaction that is worth €1.73 billion in a combination of shares, cash and a loan note which would leave Lyreco shareholders with a 30 percent stake in the new entity.
"This is a brilliant defensive move by both companies," den Drijvers told OPI.
"Corporate Express is trying to fend off the Staples takeover, and for Lyreco it also blocks a strong competitor in Europe. It makes perfect sense."
In a telephone interview with OPI on the day of the announcement, Peter Ventress was adamant that the Staples bid had nothing to do with the Corporate Express-Lyreco agreement.
"There’s no catalyst and there’s no pressure from Staples. We’re doing this because it’s the right deal for Corporate Express and for Lyreco," he said, adding that the two companies had met informally on a number of occasions over the years and that formal talks had begun "earlier this year", without specifying whether this was before or after Staples announced its intention to acquire Corporate Express on 19 February.
However, analysts took this view with a pinch of salt and clearly saw it as a move to block Staples.
"Whether someone who was appointed CEO in October with a new stand-alone strategic plan would then be willing to stand aside a few months later without any outside pressures is open to question," one analyst told OPI.
Even though the Corporate Express-Lyreco agreement has been signed by the boards of both companies and by Lyreco’s shareholders (Lyreco is a private company), the whole deal means nothing without the approval of Corporate Express’ own shareholders. Peter Ventress and Eric Bigeard will be spending the next couple of weeks personally trying to convince them of the merits of their strategy before an extraordinary general meeting takes place sometime in the second half of June to vote on the transaction.
But it is by no means certain that they will be successful.

 

"While the odds of Corporate Express avoiding a takeover by Staples went up with this announcement, we don’t think the company has escaped completely," Jefferies and Company analyst Dan Binder told his clients in a report.
"We believe a union between Staples and CXP is the better of the two deals, in large part because the bulk of Corporate Express’ turnaround needs to occur in the US, where Staples already has a dominant presence (Lyreco has none) and market intelligence, and where a combination would eliminate an aggressive competitor that has a history of pricing irrationally at times. Meanwhile, it would also give Staples a solid footing in Europe from which it can expand."
So we go back to the question: "How much does Staples want Corporate Express-
"The ball is most definitely in Staples’ court," said den Drijver.

 

"We believe that if Staples keeps its bid at €8.00 per share, the chances that shareholders will accept the Lyreco transaction are rather high. However, if Staples were to increase its offer to €9.00 or higher, shareholders may opt to vote against the Lyreco transaction and realise an almost equal value immediately."
"There is something to be said for a bird in hand," agreed Dan Binder in his report.
"But Corporate Express shareholders are faced with a difficult decision. Perhaps what could make that decision an easier one is a higher bid from Staples, which we think could come at some point during the tender period if the shares tendered are short of gaining the required minimum of 75 percent acceptance level.
"A €9 bid would put a three point gap (50 percent higher value) between the Staples bid and what we think Corporate Express shares are likely to be valued at in the market after consummating a deal with Lyreco using the current offer terms."
With a large turnover in Corporate Express’ traded share capital since January, the number of shareholders playing an arbitrage game (ie. looking to make a quick profit), which some estimate as being as high as almost 40 percent, also counts against the Lyreco transaction’s chances of success.
Reacting initially to the news from Amsterdam, Staples said that it was "considering all options" and then on 22 May proceeded with a tender for the outstanding subordinated notes of Corporate Express US Finance – a move consistent with its original takeover bid.
So while Lyreco does well out of the merger agreement as it stands, it could well be left isolated if Corporate Express’ shareholders opt to accept a raised Staples bid. Would Lyreco itself then become a takeover target for an all-powerful Staples?
A target, yes – but whether it would allow itself to be swallowed by Staples is another matter. It has been assumed for years that Staples would eventually buy out Lyreco, but this has never happened, and then in a matter of weeks Lyreco ties up a deal with Corporate Express, essentially to block Staples gaining a strong foothold in Europe! Perhaps there is more than meets the eye to the Lyreco-Staples relationship.
Firstly, whether or not the Lyreco-Corporate Express deal goes through, it would seem to be the end of the strategic partnership that Staples and Lyreco have had for a number of years. According to one industry insider, there has been a cooling in relations between the two companies recently, especially when Staples started to encroach on Lyreco’s turf, for example by acquiring a local office dealer in Taiwan.
Speaking at the 21 May press conference in Amsterdam, Bigeard showed little sentiment for the relationship, saying that administration of these contracts was basically done unilaterally and that he fully hoped to bring the business they generated to the new organisation should Lyreco merge with Corporate Express.
Secondly, let’s look at the status of Lyreco in the Corporate Express deal. The Lyreco name remains in Europe and Asia-Pacific, operational headquarters are in Marly, the new entity will move to the Lyreco IT platform and adopt, more or less, the Lyreco business model and best practices, and lastly, but by no means least, Eric Bigeard becomes the CEO of the merged businesses. One doubts whether any of the above would happen if Lyreco was bought by Staples. Assuming these are important issues for Lyreco and its management and that they have been a stumbling block in a Lyreco-Staples tie-up in the past, would Lyreco just lie down and let itself be taken over? Perhaps only for a price that Staples would not be willing to pay.
The situation should become clearer towards the middle of June. Assuming that the Corporate Express extraordinary shareholders’ meeting takes place during the week commencing 16 June, Staples would have to raise its offer in good time to allow the shareholders to make a considered decision.

 

Peter Ventress has played his trump card, but is now short on chips. Will Ron Sargent simply outbid him into folding?