Office Depot, OfficeMax to merge to compete with Staples

, Bloomberg


Office Depot Inc. and OfficeMax Inc. agreed to combine in a stock swap after losing sales to online rivals and Staples Inc., the largest U.S. office-supplies chain.

Office Depot will issue 2.69 new shares for each outstanding OfficeMax common share, according to a statement today. That’s equal to $13.50 a share, based on yesterday’s closing price.

The combined company will generate revenue of almost $18 billion compared with $25 billion in sales last year for Staples. The company may accelerate the closing or selling hundreds of stores after Starboard Value LP, an activist fund that became Office Depot’s largest shareholder in September, pushed for expense reductions.

“Consolidation is needed in an overstored and secularly declining industry,” Greg Melich, an analyst at International Strategy & Investment Group LLC in New York, wrote in a note Feb. 19. “We see two fundamental shifts that continue to hurt demand: digitization of the workplace (that is reducing the demand for traditional office products) and a shift to e- commerce.”

Starboard Chief Executive Officer Jeffrey Smith wrote a letter to Office Depot CEONeil 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.

A combination may generate as much as $580 million in cost savings, Daniel Binder, an analyst for Jefferies & Co. in New York, wrote in a note to clients. Both chains have been closing locations and that trend would accelerate with a merger as about 50 percent of their store territories overlap, he said.

The combined OfficeMax and Office Depot may close or sell as many as 600 locations, giving Staples an opportunity to increase sales in those areas, Gary Balter, an analyst for Credit Suisse Group AG in New York, wrote today in a note to clients. Staples rose 12 percent to $14.50.

Staples had 2,295 stores worldwide as of Jan. 28, 2012. In statements earlier this month, Office Depot said it had about 1,675 global locations and OfficeMax said it had about 900 stores in the U.S. and Mexico.
‘Makes Sense’

“It makes sense to close a lot of stores and fulfill orders out of facilities that specialize in packing and delivering, using less expensive real estate,” Erik Gordon, a business and law professor at the University of Michigan in Ann Arbor, said in an e-mail Feb. 19. “It’s become a cost-driven, commodity business. Everyone sells Bic pens and Swingline staplers. The competitive advantage is to sell them cheaper and get them delivered quickly.”

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