Office Depot Rings up Major Buyer

Date: Wednesday, November 28, 2007
Author: Alexander Eule, Barron's Online

BLACK FRIDAY MIGHT HAVE BEEN a little blue for Office Depot, but one hedge fund is building a significant stake in the office-supply stock.

Ziff Asset Management, a hedge fund connected with the one-time owners of Ziff-Davis Publishing, disclosed a 6.4% stake in Office Depot Monday through a Securities and Exchange Commission Filing. Ziff now owns 17.6 million shares of Office Depot, making it the company's second-largest holder, according to Thomson Financial's StreetSight. (Barclay's Global Investors owns 10.2% of Office Depot stock.)

Ziff Asset Management makes investments on behalf of the Ziff family, which sold a 95% stake in Ziff-Davis publishing in 1994.

As of Friday, the Ziff stake in Office Depot was worth approximately $307 million. It's unclear how long the firm spent building the position or what it paid for the stake, however. As an investment firm focused on family investments, Ziff is not required to disclose quarterly updates about its portfolio, according to Ben Silverman, director of research at InsiderScore.com.

By compiling all of Ziff's 13G SEC disclosures -- the type the firm filed today for Office Depot and required when any investment firm exceeds the 5% equity threshold for a company -- Silverman calculates that Ziff has assets of over $4 billion.

Silverman says he knows Ziff to be a long-term focused investment manager. "They're not activists," he adds.

Ziff's public disclosure of its Office Depot ownership comes at a time of concern about holiday retail spending and Office Depot's performance, in particular. The company's shares have fallen 57% over the last 12 months.

Office Deport reported third-quarter results last Tuesday and said North American comparable store sales were down 5% for the quarter. At the time the company said, "Virtually all of the comparable sales decline was attributable to macro economic variables, mostly housing econometrics."

On Monday, in an investor presentation filed with the SEC, Office Depot called Black Friday sales "okay" but added that total sales thus far for the fourth quarter were "still softer than [the] previous quarter."

For 2008, Office Depot said it had an "action plan in place to deliver improved sales and margins, particularly in the second half of the year." The company said sales would remain challenged into the first quarter.

Analysts were largely downbeat on last week's results. Bear Stearns downgraded Office Depot shares to Peer Perform from Outperform. Analyst Christopher Horvers wrote, "While we acknowledge that Office Depot 'looks cheap' at its current price, we believe that one can be patient with the stock and wait for either a lower entry point or some evidence that the company is making traction."

Goldman Sachs, meanwhile, cut its price target on Office Depot to $24 a share from $26, while holding a Neutral rating. "We don't expect the company to get paid for prospective performance any time soon," analyst Matthew Fassler said in a research note. The analyst acknowledged overall sluggish retail spending, but added that Office Depot "appears to be taking it harder than most."

On average, analysts hold a price target of $21.39 for Office Depot shares, according to Thomson Financial data.

Shares fell 5.5%, or 96 cents, Monday to close at $16.54.