ODP Corp ($ODP) — FY21

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Price: $44 Market Cap: $2.13bn Valuation: 4x EBITDA Category: General

FY21 Review

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  • Revenue declined slightly in Q4 and earnings grew a decent amount (from $0.43 to $0.71 per share). Full year picture was mostly the same (sales down, earnings up).
  • Repurchased $186m in shares during Q4 — 3.7m shares repo’d at ~$42 per share... An additional $277m remaining on the buyback authorization
B2B segment starting to bounce back — Q4 revenue grew 2% and EBIT grew 67% YoY from $18m to $30m — finished the year at $119m operating income which is still well below 2019 level of $271m
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Retail segment normalizing — revenue down 7% YoY and EBIT flattish
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Sale of the CompuCom business — it was highlighted at $305m in total value but the makeup is much less exciting than that — $125m in cash, $55m in seller note (matures in 2027), and $125m in an earn-out
consideration consisting of a cash purchase price equal to $125 million (subject to customary adjustments, including for cash, debt and working capital), an interest-bearing promissory note in the amount of $55 million, and a holding fee (“earn-out”) provision providing for payments of up to $125 million in certain circumstances. The promissory note accrues interest at six percent per annum, payable on a quarterly basis in cash or in-kind, and is due in full on June 30, 2027. Under the earn-out provision, if the purchaser receives dividends or sale proceeds from the CompuCom business equal to (i) three (3) times its initial capital investment in the CompuCom business plus (ii) 15% per annum on subsequent capital investments, the Company will be entitled to 50% of any subsequent dividends or sale proceeds up to and until the Company has received an aggregate of $125 million. The Company also agreed to provide certain transitional services to the purchaser for a period of three to twelve months under a separate agreement after closing.
  • Guidance for 2022 a bit uninspiring — “The Company anticipates generating annual revenue, operating and cash flowresults in a range consistent with the prior year, andexpects to refine and update its outlook for 2022as conditions related to the pandemic and supply chain challenges dissipate, and further progress is made on its previously disclosed strategic initiatives”

Thoughts

As a reminder, this is a special situation where ODP is actively trying to break apart the company (good business / bad business) while simultaneously returning a big slug of cash to shareholders. It may wind up being less upside potential but with a greater degree of certainty (they will buyback a lot of stock and they will spin the Retail segment if a sale process doesn’t work out).

The

  1. There wasn’t much commentary around the sale of the Retail segment on the earnings call but it sounds like things are still moving along. The bid is $1bn or ~$20 per share for that segment.
  2. B2B saw some growth in Q4 but still looks a long way away from 2019 earnings levels. While the event-driven aspect to ODP should play out just fine, the upside amount is pretty dependent on whether B2B looks like 2019 or 2021...
  3. Cash + CompuCom sale — Net cash was $266m at Q4 and after the quarter ended they collected another $125m in cash and $55m in promissory note from the CompuCom sale or $446m in cash + receivables. That’s $9 per share.