OfficeMax, Office Depot may merge as early as this week

, Bloomberg

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Office Depot Inc. and OfficeMax Inc. are discussing a merger with a deal possible this week, said a person familiar with the matter.

The companies have been discussing a potential stock swap that would create a single office-supply retailer to compete with Staples Inc., said the person, who asked not to be identified because the talks are private. Office Depot, the second-largest office-supplies retailer in the U.S., has been exploring options since September, when activist fund Starboard Value LP became its largest shareholder.

A merger would create a company with almost $18 billion in revenue, compared with $25 billion in revenue last year for Staples. A deal also could be a victory for Starboard, which has been pushing Office Depot to create value for shareholders. The shares have declined about 90 percent from a peak in 2006.

Starboard chief executive officer Jeffrey Smith wrote a letter to Office Depot CEO Neil Austrian on Sept. 17 arguing that the retailer's "poor operating performance" has hurt the stock. Smith, whose firm owns 13 percent of the chain, recommended smaller stores carrying fewer items. It also should cut general expenses and lower advertising costs, he said.

While Starboard would support the idea of a merger, the firm would need to see terms of the deal before approving anything proposed between the two retailers, said a person familiar with that matter.

Company Responses

Julie Treon, a spokeswoman for Naperville, Illinois-based OfficeMax, wouldn't confirm merger talks. "There have been rumors for a while about consolidation in the marketplace," Treon said by phone. "It's also been our policy not to comment on market rumors or speculation."

Brian Levine, a spokesman for Boca Raton-based Office Depot, declined to comment in an email. The Wall Street Journal reported the talks yesterday on its website.

Any deal struck may be challenged by the Federal Trade Commission, said David Balto, an antitrust attorney in Washington who was the FTC's director of policy for six years ending in 2001. He worked on the FTC's lawsuit that stopped Staples from acquiring Office Depot in 1997.

Balto said reducing the number of big-box office retailers from three to two may be viewed as anti-competitive, just as it was back then. In addition, the Obama administration has been tough about enforcing antitrust laws, he said.

"They are facing a stiff wind," Balto said in a phone interview. "You have three players right now and they want to reduce it by one. That rivalry results in better pricing and services for consumers."

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