Updated: Wednesday, 20 Feb 2013, 11:13 AM EST
Published : Wednesday, 20 Feb 2013, 7:48 AM EST
NEW YORK (AP) — Office Depot and OfficeMax are being collated.
The retailers said Wednesday they have agreed to combine in an all-stock deal worth about $1.2 billion that would transform the office-supply retail sector, helping the No. 2 and No. 3 chains compete against industry behemoth Staples. The first move toward consolidation in an industry that is bloated with stores reflects the changing retail landscape as "big box" stores have become outmoded and more people shop online.
Liang Feng, a Morningstar analyst, said the combination would be positive for the companies. But he said it might not be enough to help the combined company succeed in the changing marketplace.
"The industry will face longer term structural headwinds with competitors like Amazon, Costco gaining ground and the decline in demand for secular office products like paper, pens and ink," he said.
Office Depot Inc. and OfficeMax, along with bigger rival Staples Inc., were all founded in the mid- to late 1980s and helped pioneer the big-box boom in the 1990s. They expanded rapidly in the U.S. throughout the decade.
But the rise in competition from web retailers like Amazon.com and discounters like Costco and Wal-Mart has been tough on the sector, leading to decreased sales. In addition, office suppliers were slow to bounce back from the recession, as consumers and small businesses alike cut back on ordering office products.
Over the years, the companies have closed stores, slashed costs and streamlined operations to offset stagnant sales. But the industry was still seen as too bulky, and for years, rumors about possible consolidation have swirled around the sector, which is worth about $21.2 billion, according to research firm IBISWorld Inc. Of that, Staples holds a 35 percent market share, Office Depot has 26.1 and Office Max has 15.6.
The Wall Street Journal first reported the possibility of a deal between Office Depot and OfficeMax on Monday, sending stock across the sector soaring on Tuesday. Office Depot reported the terms of the deal in a release on its website early Wednesday morning, but then removed it, which caused some confusion. The company then restored the release after the market opened.
Office Depot did not respond to requests for an explanation. But Morningstar's Feng said he doesn't expect the premature release to damage the companies.
"I don't think it will cause that much of headache for the companies unless the deal doesn't go through," he said.
Boca Raton, Fla.-based Office Depot and Naperville, Ill.-based OfficeMax said holders of OfficeMax shares will receive 2.69 shares of Office Depot for every OfficeMax share they own.
That's equal to about $13.50 per share, based on Office Depot's $5.02 per share closing price Tuesday, giving the deal a total value of about $1.2 billion. OfficeMax had about 86.7 million shares outstanding as of Oct. 26, according to SEC filings. It is a 3.8 percent premium to OfficeMax's closing price of $13 on Tuesday and a 26 percent premium to OfficeMax's closing price on Friday, before word of negotiations leaked out.
OfficeMax said the move is expected to result in $400 million to $600 million in cost savings by the third year of the deal. Both companies will have equal representation on the combined entity's board. The deal is expected to be complete by the end of the calendar year. The combined company's name, marketing brands and corporate headquarters will be determined after the company names a CEO.
The deal still has to go through shareholder and regulatory approvals, and office supply mergers have been questioned by regulators in the past. In 1997, Staples attempted to buy Office Depot but the deal was nixed by the Federal Trade Commission due to concerns the combined company would have too much of a competitive advantage in the marketplace.
Consolidation will likely be good for the industry, though. Both Office Depot and OfficeMax have been hurt by restructuring costs and continued weak sales.
Office Depot, which has 1,675 stores worldwide, reported a loss of $17.5 million, or 6 cents per share for the three months ended Dec. 29. Excluding one-time items, the company broke even per share. Revenue continued to be weak, falling nearly 12 percent to $2.62 billion.
OfficeMax, which has 900 stores in the U.S., reported a loss of $33.9 million, or 39 cents per share, as it spent money on a restructuring. Adjusted for one-time costs, however, net income was 16 cents per share. Revenue fell 7 percent to $1.7 billion from $1.84 billion.
Office Depot saw shares fall 8 cents to $4.94, while OfficeMax shares rose 55 cents, or 4.2 percent, to $13.52. Staples shares fell 29 cents, or 2 percent, to $14.36.
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