Sept 17 (Reuters) - Activist hedge fund Starboard Value on Monday disclosed that it has taken a 13.3 percent stake in Office Depot Inc, making it the biggest shareholder of the No. 2 U.S. office supply retailer.
Office Depot shares were up 13 percent premarket at $2.78 on Monday.
Starboard CEO Jeffrey Smith wrote in a letter to Office Depot Chief Executive Neil Austrian that the company's shares are "deeply undervalued" but management could take certain actions such as cutting expenses to improve performance.
Starboard acknowledged in the letter to Austrian that the industry was under pressure, but said that Office Depot's performance lagged behind that of peers Staples Inc and OfficeMax.
Office Depot has been facing tough competition from other office products suppliers as well as mass merchants and drugstores.
Although Office Depot has taken steps such as cutting costs and trying to improve the format of its stores, Starboard called for lowering expenses, including advertising costs, and focusing on higher-margin services in its North American retail division to boost profitability.
Starboard also said Office Depot's profitable Mexican joint venture, which is not consolidated in the company's financial statements, could be worth more than 50 percent of Office Depot's enterprise value.
Starboard recently staged a proxy battle with AOL Inc to unseat three directors on the board of the Internet company but lost.
Many investors look at office-supply retailers as a barometer of economic health because demand for their products is closely tied to white-collar employment rates.
Sales at all office supply chains have suffered as corporate customers and other shoppers cut back on discretionary spending in the weak economy.