By David McLaughlin & Matt Townsend
Office Depot Inc. purchase of OfficeMax Inc. won approval from U.S. antitrust regulators, clearing the way for the office-supply companies to create a single retailer to compete with Staples Inc.
The U.S. Federal Trade Commission voted to close its seven-month investigation into the merger, saying online retailing ensured competition in the retail market for office supplies, according to a statement today.
The agency said the market has changed significantly since 1997, when it derailed Staples’s acquisition of Boca Raton-based Office Depot as anticompetitive. Consumers today rely on retailers such as Wal-Mart Stores Inc. in addition to Internet shopping for office products, the commission said.
“The current competitive dynamics are very different,” the FTC said. “The commission’s investigation shows that today’s market for the sale of consumable office supplies is broader.”
Office Depot and OfficeMax, the second and third largest office-supply chains in the U.S., agreed in February to combine in a $1.17 billion deal after losing sales to online rivals and to Staples. They said the merged company would have more than 2,100 stores and combined revenue of about $18 billion compared with more than $24 billion in sales for Staples, the largest office-supplies chain.
OfficeMax, based in Naperville, Illinois, gained 3.5 percent to $15.50 in New York, and Office Depot, rose 3.2 percent to $5.77. Staples rose 0.32 percent to $16.18.
Changed Industry
The merger was completed Nov. 5, the companies said in a statement. OfficeMax investors will swap a share for 2.69 shares of Office Depot under terms of the transaction.
The industry has changed since 1997, said Matt Reilly, an antitrust attorney at Simpson Thacher & Bartlett LLP, which advised Office Depot. When asked if the FTC’s decision could impact other retail transactions, Reilly, a former lawyer at the FTC, said “to the extent that other brick and mortar retailers are facing the same competitive forces that office suppliers have in terms of the Internet and big box stores, yes it will.”
Bradley Thomas, a New York-based analyst at Keybanc Capital Markets Inc. said it wasn’t a surprise the transaction won antitrust approval.
“There is competition coming from a number of fronts, not just the office superstores,” said Thomas, who has a ‘buy’ recommendation on OfficeMax and Office Depot and a ‘sell’ on Staples.
The merger represents “a new beginning for Office Depot and OfficeMax — one that will enable us to create a stronger, more efficient” company, Office Depot Chief Executive Officer Neil Austrian said in a statement.
Work Ahead
It still isn’t clear who will lead the new company, where will it be headquartered and which brand will be used, said Oliver Wintermantel, an analyst at International Strategy & Investment Group LLC in New York.
“They have a lot of work ahead of them,” Wintermantel, who has a neutral rating on Office Depot and OfficeMax, said in an interview.
The companies said in August they aimed to have a CEO in place by September. At the time, they said they had five candidates, without disclosing their names. Ravi Saligram, OfficeMax’s CEO, later said he withdrew his name from consideration. Office Depot CEO Austrian also was part of the search, but neither he nor the company has said he was a finalist. Both companies declined to comment on when a CEO would be named.
Having a larger competitor doesn’t bode well for Staples, said Wintermantel, who has a sell rating on the shares. The Framingham, Massachusetts-based chain has posted declining sales in seven of the past eight quarters.
Bigger, Leaner
The Office Depot-OfficeMax combination will have more power when dealing with vendors and the impetus to close a lot of underperforming stores, a move needed throughout the industry, Wintermantel said. “They have become a bigger and leaner company, so for Staples it will become harder down the road,” he said.
Over the next few years, the merger will help Staples, said Gary Balter, a New York-based analyst with Credit Suisse Group AG. Staples will pick up sales as the merged company closes stores. Contract customers are also more likely to move over to Staples because of disruption caused by the tie-up, he added. The benefit of the merger could add 32 cents to Staples’s earnings per share next year, Balter said.
“There will be some growing pains” as it “depends a lot on how they execute,” said Balter, who has an ‘outperform’ rating OfficeMax, and ‘neutral’ ratings for Office Depot and Staples. “Staples will try to take advantage of that.”
Cost Savings
The merging companies have said they expect the combination to cut as much as $600 million in costs. That doesn’t include what could be saved from closing stores, as they were waiting for approval from the FTC to provide those details, Balter said. The new company may close 500 stores by 2016, Balter wrote in a note to clients in May.
Staples and Office Depot-OfficeMax are all facing declining demand as offices become more digital and have less need for pens, papers and printers.
“We are still bearish on the industry,” ISI’s Wintermantel said. That being said, the merger “was the right decision because without it one would have gone away in a few years.”
Fitch Ratings said Staples may benefit from the deal in an Oct. 2 research note. Disruption from the combination should help Staples retain existing contract customers and win new customers from Office Depot and OfficeMax, Fitch said. Any store closures would also reduce excess square footage in the sector, according to the note.