Starboard letter urges Staples to merge with Office Depot

Starboard Value has written a letter to Staples urging it to merge with rival Office Depot, potentially setting the stage for the activist investor to pursue a proxy contest several weeks from now.

In December, Starboard revealed it had taken a 6.1 percent stake in Staples and increased an existing stake in Office Depot to 9.9 percent. At the time, CNBC reported that Starboard was pursuing a merger but the investor hadn't made its intentions public until now. Starboard met with Staples shortly after making its stake and had cordial discussions about a merger with Office Depot, according to a person familiar with the matter.

Read More Starboard wants Staples, Office Depot to merge: Sources

Adam Jeffery | CNBC

Last week, Staples announced a series of governance changes such as its intention to separate the CEO and chairman roles but didn't address the possibility of a merger or indicate it was giving the idea any consideration. Staples is expected to reject the request for a merger from Starboard, the Financial Times reported.

In its letter to Staples, Starboard said that synergies from a merger with Office Depot would be sufficient to double the operating profits of the combined company. Starboard added that "if it becomes clear to us that you have no intention of seriously pursuing this unique and highly attractive opportunity, it would be a clear sign that significant leadership change is needed at Staples."

Starboard didn't indicate it plans to nominate directors on the Staples board, but it will need to make a decision soon. According to public filings, The deadline for nominating directors to the Staples board is 90 days prior to the anniversary of the 2014 shareholder meeting. That indicates a deadline on or around March 4, 2015.

Starboard faces a similar situation at Yahoo, in which it revealed a stake last year. The activist has urged Yahoo to make a tax-free divestment of its stakes in Alibaba and Yahoo Japan, while also considering a merger with rival AOL. Yahoo has not yet taken any of those steps, though it is expected to outline plans for the Alibaba stake later this month. The deadline to nominate directors to the Yahoo board is March 27.

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Starboard's letter is expected to be made public later Tuesday.

Starboard declined to comment and Staples didn't respond to a request for comment.

UPDATED: This story was updated include the report from the Financial Times that Staples is expected to reject the Starboard request.