Last night after the bell, office supply company Office Depot (ODP 3.85, -0.74 -16.1%) announced an agreement to acquire IT services firm CompuCom Systems for a total consideration of about $1 billion, which includes the repayment of CompuCom debt and issuance of new ODP shares; additionally, ODP announced preliminary Q3 results and lowered its full-year outlook.
ODP announced it is pivoting the company from a traditional office products retailer to a broader business services and technology products platform. As the first step in this new strategic direction, the company has entered into a definitive agreement to acquire CompuCom Systems, an IT services, products and solutions that enable the digital workplace for enterprise, small and midsize businesses.
Under the terms of the agreement, ODP will acquire CompuCom from Thomas H. Lee Partners, L.P., a private equity firm, for a total consideration of about $1 billion, which includes the repayment of CompuCom debt and issuance of new ODP shares. Following the transaction, THL will hold an equity position in Office Depot of about 8% of total shares outstanding.
The company expects the deal to add about $1.1 billion of revenues, deliver expected cost synergies of more than $40 million within two years and give the company the ability to realize substantial revenue synergies over time as a result of the opportunity for CompuCom to access ODP’s multi-channel customer base. ODP will finance the acquisition with new debt and the issuance of about 45 million shares of its common stock to THL. The company expects to refinance CompuCom’s existing debt with a new term loan of about $750 million.
CompuCom’s established SMB offering, Tech-Zone, will be placed within ODP’s nationwide retail footprint, providing immediate scale and driving traffic into ODP stores. Added services revenue and increased foot traffic should improve per-store profitability.
Additionally, ODP announced preliminary Q3 results and updated its full-year outlook. The company sees total reported sales declining between 7-8% for the quarter including store closures. Notably, ODP sees between a 5-6% decline in comparable retail store sales and between a 5-6% decline in constant currency sales within the BSD. Adjusted operating income is expected in a range of $125-$135 million on free cash flow from continuing operations of about $200 million.
Management noted the guidance update was driven by a few factors; namely, three hurricanes in the U.S. and Puerto Rico, where a significant concentration of ODP's retail and BSD customers are located, particularly in Texas, Florida and Puerto Rico. Lower sales and store traffic during this year's back to school period, which is typically a strong season for Office Depot. Temporary higher supply chain costs arising primarily from transition issues related to planned consolidation of vendors and warehouses. Professional fees and other costs related to developing the company's strategy and transition to a broader omnichannel business services platform.
Management also noted that the company expects to provide an updated long-term outlook, including the impact of the CompuCom acquisition, with the announcement of its Q3 financial results; however the company has lowered its outlook for 2017. Specifically, adjusted operating income for fiscal 2017 is now estimated to be between $400-425 million, excluding the impact of this transaction, compared to the previous estimate of about $500 million. Depreciation and amortization for the year is still estimated at $150 million with capital expenditures totaling $125 million compared to the previous estimates of $150 million for capital expenditures.