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How will Essendant respond to market forces?

Monday, March 5, 2018  
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There are some interesting market dynamics in play that might shape a new future for US business products wholesaler Essendant.

There is some noise in US office products circles at the moment regarding the future direction of Essendant as the wholesaler continues to face – among other things – the impact of declining sales and earnings, a depressed stock price, reseller consolidation and new sourcing strategies from its national reseller customers.

OPI takes a look at a couple of possible outcomes.

1. Core customers being acquired – is attack the best form of defence?

In the past 18 months or so, both Staples and Office Depot have acquired large independent dealers, Staples buying Florida-based Capital Office Products and Depot leading Western US dealer Complete. Both of these transactions have had a negative impact on Essendant’s sales to its most important independent customer group, and the loss of a large independent reseller was important enough for Essendant CEO Ric Phillips to call it out on last week’s conference call.

With this trend likely to continue, where does that leave Essendant?

One obvious solution is for it buy dealers before the big-boxes get their hands on them, thereby protecting its volumes. That would mean a change in strategy and would be – for some – a controversial course of action, the counter-argument being that it is better for the health of the independent dealer channel if these resellers are acquired by Essendant rather than by one of the national chains.

It is also possible that independent owners looking to sell may get a better return by selling to Essendant, especially if the price is based on an earn-out (where the final price is determined by the future, post-sale performance of the business).

Why is that?

Well, if an Essendant dealer does sell to Staples/Depot, you can probably assume that Essendant will do its best to keep as much of the business as it can via its other reseller partners. The fact that WB Mason – Essendant’s largest customer – focused on the Florida market shortly after Staples acquired Capital is probably not a coincidence. What part, if any, Essendant had in that, we don’t know, but the wholesaler referred specifically to WB Mason as one of its growth drivers at the end of last year.

On the other hand, if Essendant acquired a dealer on an earn-out, one might assume there would be some kind of mechanism in place to protect that dealer’s business – within the bounds of normal competition – during the earn-out period.

There might also be the potential of some Essendant share incentives thrown into a dealer acquisition, especially with the current stock price being so low. That, though, could be something of a risky choice, as those in the industry long enough to remember USOP’s roll-up strategy in the late 1990s will no doubt attest to.

2. Essendant’s low market capitalisation: ripe for an opportunistic buyout?

Essendant’s beleaguered share price jumped by around 9% in the days following last week’s Q4 earnings that beat Wall Street estimates before falling back in the past few days. The current share price of around $8.40 is still less than a quarter of what it was two years ago, and the company’s market capitalisation is under $320 million.

That depressed market cap means that Essendant is trading at around 0.6x its book value. This ratio is not necessarily an indication that a company’s stock is undervalued, but it does appear that some institutional investors have bet on Essendant. Two investment firms – Pzena Investment Management and Blackrock – own more than 25% of Essendant’s common stock between them and have raised their holdings in the wholesaler over the past few months according to recent regulatory filings. 

Pzena, in particular, has more than doubled its exposure to Essendant over the past 12 months, taking a 13.5% stake in the firm, up from 6.3% in February 2017. It is an investment firm that has historically chased undervalued and underperforming stocks and was one of the leading shareholders in Staples when it was acquired by Sycamore Partners last year. In fact, Pzena founder Richard Pzena initially opposed the Sycamore acquisition, saying the $10.25 offer per share undervalued Staples, having earlier said the office supplies’ firm’s stock price could move above $20.

Do the positions of Blackrock – the world’s largest asset manager – and Pzena suggest that they are taking a calculated risk on a transformative development at Essendant?

It’s certainly possible, because there don’t appear to be any short-term drivers that will significantly boost the company’s share price, and the longer term is fraught with uncertainty about whether the company can deliver on its growth strategy – although Blackrock and Pzena do have a ‘safety net’ of a relatively high-yield quarterly dividend of $0.14 per share which nets each investment firm between $2.7-$2.8 million a year.

We suggested last year that Essendant’s board would be looking at external growth drivers such as going private or a transformational merger, and that still holds true today, probably even more so given the continued nosedive of the share price since then.


From an organic growth point of view, while there are a few positive areas for Essendant such as its Vertical Markets Group, industrial supplies unit and its CPO automotive reseller division, these are currently insufficient to offset the negative impacts of secular declines in core products, industry consolidation and more direct purchasing by large resellers.

A proactive move to protect its core customer base – ie by buying larger dealers that may be the target of Staples and Office Depot – would therefore seem to make sense. Obviously, there is no guarantee that Essendant would be the highest bidder if it did choose to take this strategy, but it would shift the M&A market if it was in the game.

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