Ledecky's U.S. Office Products to Split in 5
By Margaret Webb Pressler
Company executives said they hope the deal will bolster the value of U.S. Office Products stock, which has been depressed, they have long maintained, because of the company's complex structure. Additionally, founder and chairman Jonathan J. Ledecky has complained for months that his Washington-based company was being punished because of the problems some of his competitors are experiencing.
"I'm sick and tired of having our [company] compared to broken companies," Ledecky said on a conference call yesterday with hundreds of analysts, investors and employees listening in. "Well, there are two things you can do: You can whine, or you can take action."
In trying to increase value for stockholders, Ledecky is reversing the super-consolidation strategy upon which he has built his company. Just shy of its third birthday, U.S. Office Products has surpassed $4 billion in annual sales through dizzying acquisitions of smaller companies in a variety of sometimes loosely related industries that provide office products or services to corporate clients. The company had argued that having all those businesses under one roof created efficiencies and allowed for "cross-selling" among them.
U.S. Office Products will separate its corporate travel services, educational supplies, print management and technology solutions divisions into separate businesses -- none based in the Washington area -- leaving behind a $2.7 billion Washington company that will concentrate on selling office products, furniture and coffee supplies to corporate clients.
"The lesson I have learned is that Wall Street wants a simple story," Ledecky said in an interview.
Analysts generally applauded the new corporate structure -- which requires shareholder approval. The company's stock jumped 16 percent -- $2.81 1/4 a share -- yesterday to close at $20.56 1/4 on the Nasdaq Stock Market, a gain, analysts said, that reflects investors' belief that they will now be able to get a clearer picture of the company's strategy and performance.
"The reality is, the more difficult a business is to understand, the more people are going to discount" the stock price, said Jim Stoeffel, an analyst with Salomon Smith Barney in New York.
Ledecky, who has been the driving force behind U.S. Office Products, will hold no executive position or board seat at any of the reorganized companies so he can concentrate on other business ventures, especially Consolidation Capital Corp., he said. Ledecky announced last week that the Washington-based company, which went public last month, will focus on facilities management -- buying companies that provide a variety of services to institutional building owners, such as pest control, landscaping and equipment maintenance.
Yet Ledecky said he will have large stock holdings in U.S. Office Products and its four spun-off companies and will remain closely involved as a consultant. "I didn't want to be an employee of more than one company," he said. "I owe it to the stockholders of Consolidation Capital . . . to focus and drill down on that opportunity."
The U.S. Office Products spinoff and stock buyback will be backed by $270 million from Clayton, Dubilier & Rice Inc., which will get a 24.9 percent stake in the slimmed-down U.S. Office Products. CDR is a private investment firm that, over the past 20 years, has earned profits averaging about 30 percent a year for its clients by investing in 26 companies. It usually holds stakes in companies for two to seven years, then cashes in, often by arranging the sale of the business.
Backed by a $1.5 billion pool of capital raised from private investors, "we bring very strong financial resources" that will enable U.S. Office Products to continue to make acquisitions, said Charles Pieper, a principal with the firm. While he argued that consolidation was the right strategy for U.S. Office Products, Pieper acknowledged that the market "did not value all of those pieces after putting them together."
Some analysts, said even though there were some efficiencies to be gained by aggregating various office-related businesses under one roof, some of U.S. Office Products' acquisitions may have been too far afield.
"I really do think that some of those businesses probably do make more sense on a stand-alone basis, and probably always did," said Danielle Fox, an analyst with J.P. Morgan Securities in New York. The streamlined company, she predicted, will be "good for shareholders."
"We never argued that there were tremendous synergies between school supplies and office furniture," she said. "I think that what they're doing is being responsive to what the market is telling them."
U.S. Office Products shareholders, most of whom are company employees or institutional funds, now have two choices: They can tender their shares for $27 apiece -- higher than the stock has been in the past year -- or they can hold on to their shares and get stock in each of the five reorganized companies. If more than 28 percent of stockholders tender their shares for $27, those shareholders who agreed to tender will get some cash and some stock, depending on the breakdown.
Analysts said shareholders who hold on to the stock are likely to benefit the most because the four spun-off businesses are healthy and have good profit margins. And because all five companies are expected to grow through acquisition, if their profitability holds, the stock could go even higher.
"My numbers are getting better and better as I delve into it," said Brad Cohen, an analyst with Sands Brothers & Co. in New York. "We see an inherent value of this company . . . in excess of $40 a share."
Staff writer Jerry Knight contributed to this report.
Even as its stock price began to wobble in mid-1996, U.S. Office Products kept acquiring companies with a vengeance, and expanding its revenue.
U.S. Office Products
Weekly stock price closes
Goes public: February 1995
By April 1995: Bought eight companies for $63.7 million; total revenue: $177 million
By January 1996: Acquired 23 more companies for $154 million; total revenue: $352 million
By October 1996: Bought 82 more companies for $832 million; total revenue: $1.8 billion
By October 1997: Bought 93 more companies for $804 million; total revenue: $1.2 billion
Yesterday: U.S. Office Products announces it is splitting into five publicly traded companies. Stock closes at $20.561/4, up $2.811/4
SOURCES: Bloomberg News, U.S. Office Products
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