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  OfficeMax finally a takeover target

BENJ GALLANDER and BEN STADELMANN

Friday, July 18, 2003

Back in December 2000, when OfficeMax was trading at $1.62 (U.S.), the headline on our column read, "Why OfficeMax looks like a takeover candidate." We continued by saying: "It is virtually impossible to know when a takeover will occur. Rumours abound about various companies being in play and, more often than not, they are false. But there are signs to look for -- and we found many in last month's purchase of OfficeMax."

Two and half years later, we are right, though a key component of our rationale was incorrect.

Our postulation was that Slim Helu, one of Mexico's richest men, was a likely candidate to pounce on the enterprise. He had been kind enough to buy our stake in CompUSA, the largest computer retailer in the U.S., and his accumulation of OfficeMax was common knowledge in the trade.

Slim, however, recently decided that Circuit City presented a more interesting target, and though his recent offer was rebuffed, he may yet press his bet. In the meantime, Boise Cascade has been kind enough to pony up a $9-per-share combination of cash and stock in what appears to be a done deal.

OfficeMax is a good fit with Boise. Long a heavy hitter in the wood and paper-product biz, with annual sales of more than $7 billion, Boise has been a smaller player in the office-supply trade. In Canada, it is the parent company of Grand and Toy.

It appears that Boise is bidding at a pretty good time. OfficeMax has been retrenching operations for the past two years, and though a loss this quarter is in the cards, same-store sales are up more than 9 percent -- a stellar showing in the current retail environment.

Add a squeaky-clean balance sheet, and OMX should become even more competitive with the bigger guys on the block, Office Depot and Staples.

One question we will likely face soon is what to do with the Boise stock acquired in the transaction. Surprisingly, it resembles in many ways a stock that would easily fit into our portfolio, trading towards the bottom end of its 10-year range, close to book value, and with a primo dividend of 60 cents. Whether that dividend is secure bears closer scrutiny.

Our predilection is to hold tight in this takeover and receive our funds in full. That is because, as in most cases, OMX is trading at $8.69, a decent discount to the takeover price. Plus, commissions are normally avoided by tendering. Those two factors combined often work out to 3 percent or so for a couple of months' work -- not a bad return at the best of times.

Moreover, there is the possibility that another suitor will enter the fray -- although in this case, Boise would have to be paid a hefty premium to take a hike, making that possibility unlikely.

Meanwhile, besides OMX, our Corel stake is being pursued by Vector Capital.

In each of the past 10 years, at least one holding in our Contra portfolio, which has averaged about 25 stocks, has been taken over. The vast majority of the takeovers came at a significant premium to our purchase price.

The key reason for this streak is not simply our contrarian bent, but our essence as value investors. Our nose for value has contributed significantly to our 25.2 percent annualized return over the last decade.


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