ODP, parent of Office Depot and CompuCom, has announced a company breakup plan. The twist: ODP is still trying to sell off CompuCom -- the MSP business unit - before ODP potentially breaks into two businesses focused on retail and B2B solutions, respectively.
The back story: Office Depot acquired CompuCom for $1 billion — a lofty 10 times earnings at the time— in October 2017. The IT services business unit has generated mixed performance under ODP’s ownership.
CompuCom President Mick Slattery described key business progress to ChannelE2E in June 2020. However, the business struggled on some fronts during the pandemic. And a recent malware attack triggered further revenue challenges for the MSP.
For CompuCom's Q1 of 2021:
- Reported sales were $196 million, down 17% compared to the prior year period. The year-over-year decrease was due primarily to lower services volumes related to the COVID-19 outbreak and other factors, as well as lower billed service revenues as a result of the malware incident, ODP says.
- CompuCom reported $1 million operating loss in the first quarter of 2021, compared to $3 million operating income in the prior year period.
Amid those and other challenges, ODP apparently soured on the MSP business and has been trying to sell off CompuCom since late 2020.
MSP Buyouts: Strong M&A Demand, But...
The good news: M&A demand for MSPs has been strong -- with some large, platform businesses earning extremely high valuations of 15 times EBITDA (earnings before interest, taxes, depreciation and amortization).
Historically speaking, MSPs used to fetch valuations of roughly 4X to 8X EBITDA depending on quality of earnings, customer retention, diversity of customer base, business growth rates and more. But MSP valuations have generally increased as more private equity firms pushed into the MSP market. (See more than 700 M&A deals from 2020 and 2021 listed here.)
But rising tides may not lift all MSP boats. Indeed, ODPs effort to sell CompuCom might be a tricky process since the MSP business unit has occasionally struggled under ODP's ownership.
CompuCom's business challenges reinforce a familiar M&A theme: Midsize and large MSPs frequently fail to meet expectations under Big Box retail ownership. The earlier evidence: Both Best Buy and Staples entered and then exited the MSP markets over the past two decades after synergies between retail sales and SMB managed IT services failed to materialized.
ODP Company Breakup: The Plan
Meanwhile, ODP's board of directors has approved a plan to potentially break up its businesses into two publicly traded companies known as:
- ODP – a provider of retail consumer and small business products and services distributed via approximately 1,100 Office Depot and OfficeMax retail locations and an eCommerce presence (officedepot.com).
- “NewCo” – a B2B solutions provider that spans ODP’s Business Solutions Division contract business, Grand & Toy and ODP’s independent regional office supply distribution businesses. NewCo will also own the company’s newly formed B2B digital platform technology business, including BuyerQuest, as well as the company’s global sourcing office and its other sourcing, supply chain and logistics assets.
Who Will Buy CompuCom?
Within the ODP breakup announcement, the company barely mentioned CompuCom. In the final paragraph of the press release, ODP stated:
"Finally, the sale process for CompuCom, ODP’s managed workplace services provider subsidiary, is moving forward as planned, unrelated to and unaffected by today’s announcement."
