Hedge fund Starboard Value reveals it has taken a 13.3% stake in Office Depot, making it company's largest shareholder; Starboard has called for lowering expenses, focusing on North American retail division to boost profitability

Cindy Allen

NEW YORK , September 17, 2012 (Thomson Reuters) – Activist hedge fund Starboard Value on Monday disclosed that it had taken a 13.3 percent stake in Office Depot Inc, making it the biggest shareholder of the No. 2 U.S. office supply retailer.

Office Depot shares rose as much as 15 percent to a four-month high of $2.85 on Monday on the New York Stock Exchange.

Starboard CEO Jeffrey Smith wrote in a letter to Office Depot Chief Executive Neil Austrian that the company's shares are "deeply undervalued" but management could take some actions such as cutting expenses to improve performance.

Starboard acknowledged that the industry was under pressure, but said Office Depot's performance lagged that of peers Staples Inc and OfficeMax.

BB&T Capital Markets analyst Anthony Chukumba expects Office Depot to benefit from an increased sense of urgency due to Starboard's involvement, but expressed doubts if this would translate to significant improvements in financial performance.

"While we believe Starboard has clearly done its homework and raises some good points about Office Depot, we believe the proverbial devil is in the details, and many of the initiatives Starboard outlined are much easier said than done," Chukumba wrote in a client note.

The analyst noted that a large portion of the company's general and administrative expenses are largely fixed, giving the management limited leeway to reduce them.

Office Depot has been facing tough competition from other office products suppliers as well as mass merchants and drugstores.

Although the company has taken steps such as cutting costs and trying to improve the format of its stores, Starboard called for lowering expenses, including advertising costs, and focusing on higher-margin services in its North American retail division to boost profitability.

Starboard also said Office Depot's profitable Mexican joint venture, which is not consolidated in the company's financial statements, could be worth more than 50 percent of the company's enterprise value.

Starboard recently staged a proxy battle with AOL Inc to unseat three directors on the board of the Internet company but lost.

Many investors look at office-supply retailers as a barometer of economic health because demand for their products is closely tied to white-collar employment rates.

Sales at all office supply chains have suffered as corporate customers and other shoppers cut back on discretionary spending in the weak economy.

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