Staples Inc. (SPLS, Financial) has declared its plan to buy Office Depot Inc. (ODP, Financial) for about $6.3 billion. This deal would reduce the U.S. office-supply industry to a single major chain. Forging this deal would also test the limits of antitrust regulators.
In a statement given to Bloomberg on Wednesday the retailers said that, the shareholders of Office Depot will get $7.25 in cash and 0.2188 of a share in Staples stock at closing. The price is the premium of 44% on Office Depot’s closing share price on Feb. 2.
Evolving with the market
The two companies agreed to the merger after facing a lot of pressure from activist investor Starboard Value. The companies have consented to create a retail chain with about $39 billion in revenue and thousands of stores. This move is expected to stimulate scrutiny from the Federal Trade Commission. However, in the light of ever growing competition in the ecommerce world, regulators have been increasingly willing to approve retail mergers.
“The competitive environment has changed, but the government will look carefully into the effects on prices. The merger is a game changer,” said Erik Gordon, a professor at the University of Michigan’s Ross School of Business.
The investors have welcomed the move Tuesday after reports of the pending merger first came up. Office Depot rose 22% that day, whereas Staples soared 11 percent. On Wednesday, Office Depot recorded an additional growth of 2.7%to $9.53. Staples’ stocks plummeted 7.9% to $17.50, losing back most of its growth from the previous day.
Pros and cons
“Staples probably paid a little too much, but they probably had to in order to get the deal done,” Brian Yarborough, an analyst for Edward Jones in St. Louis, told Bloomberg.
According to Ron Sargent, chief executive officer of Farmingham, Massachusetts-based Staples, the purchase would help Staples deal with a rapidly changing competitive environment. This would allow the retailer to expand into new categories of products and would also help in cost cutting. In a statement given to Bloomberg, Sargent said, “This is a transformational acquisition. We expect to recognize at least $1 billion of synergies as we aggressively reduce global expenses.”
Previously in 2013, the Federal Trade Commission approved the merger of Office Depot and OfficeMax, both being the second and the third biggest companies in the industry. Now, the matter of concern is whether consumers will suffer because of bringing the industry down to one chain.
“Office Depot and OfficeMax got their recently completed merger passed by antitrusters on the theory that their merger would produce a stronger competitor to Staples,” said Gordon. “Office Depot will have to convince the government of its claim that eliminating the competition with Staples poses no threat to prices because of competition from Walmart (WMT, Financial) and Internet players. That won’t be easy.”
Conclusion
Staples got this agreement financed by Barclays and Bank of America Corporation. The financing comprises of $3 billion credit line and $2.75 billion six-year term loan. Staples will also add two Office Depot directors, as part of the transaction, and hence have a board of 13 members.
This isn’t the first time Staples tried to own Office Depot. In 1997, FTC was not in favor of Staples’ intention to buy Office Depot, as it was considered to be anti-competitive in nature. By 2013, the opinion of the FTC changed. It finally accepted the fact that advent of online retailing ensured competition in the market for office supplies.
