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Credit Suisse Upgrades Staples On Possible Merger With Office Depot

Alex Furno

Analysts at Credit Suisse upgraded shares of Staples (NASDAQ: SPLS) to Outperform on Tuesday.

Gary Balter believes "that a merger of the remaining office supply superstore chains, Staples and Office Depot, makes significant financial and operational sense."

Balter highlighted four main reasons why the two firms should combine now:

  • Merger would create years of earnings growth from synergies
  • Strong stock upside for both companies
  • Both companies are closing stores to compete with the other
  • Can focus on selling to multi-national corporations without worries of retail segment

Balter said, "apply SPLS's current valuation multiples to the combined entity, we believe the stock price of SPLS would be closer to $30 by 2017 from its current price of under $12."

Analysts feel both Staples and Office Depot (NYSE: ODP) are in serious trouble based on current valuation multiples, including free cash flow yields. However, a merger of the two companies will provide a roadmap for long-term success with the majority of profits coming from a very stable well-positioned contract business.

Shares of Staples traded recently at $12.51, up 7.06 percent. Shares of Office Depot was at $5.48, up 7.03 percent.

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