Staples Inc. plans to buy Office Depot Inc. for about $6.3 billion, forging a deal that will reduce the U.S. office-supply industry to a single major chain and test the limits of antitrust regulators.
Office Depot shareholders will get $7.25 in cash and 0.2188 of a share in Staples stock at closing, the retailers said in a statement Wednesday. The offer represents a premium of 44 percent over the price on Feb. 2, before news of the talks was reported.
The two companies, which agreed to the merger after pressure from activist investor Starboard Value, would create a retail chain with about $39 billion in revenue and thousands of stores. The move is expected to draw scrutiny from the Federal Trade Commission, though regulators have been increasingly willing to approve retail mergers in light of burgeoning e-commerce competition.
“The competitive environment has changed, but the government will look carefully into the effects on prices,” said Erik Gordon, a professor at the University of Michigan’s Ross School of Business. “The merger is a game changer.”
Investors endorsed the move on Tuesday after reports of the pending merger first surfaced. Office Depot soared 22 percent that day, while Staples gained 11 percent. On Wednesday, Office Depot rose 2.2 percent to $9.49 in New York. Staples retreated 12 percent to $16.73, signaling that shareholders weren’t thrilled with the deal’s terms.
Brian Yarbrough, an analyst for Edward Jones in St. Louis, said Staples “probably paid a little too much, but they probably had to in order to get the deal done.”
Ron Sargent, chief executive officer of Framingham, Massachusetts-based Staples, said the purchase would help it cope with a “rapidly evolving competitive environment,” letting the retailer expand into new product categories and cut costs.
“This is a transformational acquisition,” he said in the statement. “We expect to recognize at least $1 billion of synergies as we aggressively reduce global expenses.”
The FTC previously approved the merger of Office Depot and OfficeMax, the industry’s second- and third-biggest companies, in 2013. The issue now is whether consumers will be harmed by 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,” Gordon said. “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 Wal-Mart and Internet players. That won’t be easy.”
Staples said on Wednesday that it expected the deal to close by the end of this year. Barclays Plc is serving as the company’s financial adviser, with Wilmer Cutler Pickering Hale and Dorr LLP and Weil, Gotshal & Manges LLP providing legal assistance. Office Depot, based in Boca Raton, Florida, received financial advice from Peter J. Solomon Co. and legal counsel from Simpson Thacher & Bartlett LLP.
Staples obtained financing from Barclays and Bank of America Corp. in the form of a $3 billion credit line and a $2.75 billion six-year term loan. As part of the transaction, Staples will add two Office Depot directors, bringing its board to 13 members.
The heavier debt load raised concerns for credit-rating services. Moody’s Investors Service, Standard & Poor’s Financial Services and Fitch Ratings said they may cut Staples’ credit rating to junk status.
Starboard, an investor with stakes in both retailers, sent a letter to Sargent last month demanding that his company engage advisers to work on a deal. Starboard had estimated that the combination could deliver more than $2 billion in cost savings.
At the time, Staples gave a tepid response to Starboard, saying it had already met with the investment firm on several occasions to consider ideas. It didn’t discuss its willingness to make a deal.
Starboard previously pushed for the merger of Office Depot and OfficeMax, and investors have speculated that it could replicate that strategy with Staples. New York-based Starboard has said it owns about 6 percent of Staples and almost 10 percent of Office Depot.
In a conference call on Wednesday, Staples’ Sargent said the company could use the “playbook” from the merger between Office Depot and OfficeMax in this latest consolidation.
“We think they’ve done a fabulous job and we expect to really rely on that heavily,” he said.
This isn’t the first time Staples has tried to buy Office Depot. In 1997, the FTC derailed Staples’ acquisition of its rival as anticompetitive. By 2013, though, the agency’s view had shifted. When the FTC allowed Office Depot to buy OfficeMax, it said the advent of online retailing ensured competition in the market for office supplies. Consumers today also rely more heavily on big-box chains such as Wal-Mart Stores Inc. for office products, the commission said.
“Our decision highlights that yesterday’s market dynamics may be very different from the market dynamics of today,” the FTC said in its closing letter about the Office Depot merger with OfficeMax in November 2013. “In this case, significant developments in the market for consumable office supplies have led us to approve a merger when we had blocked a similar merger 16 years ago.”
While that decision opened the door to allowing a merger between Staples and Office Depot, the FTC will still closely scrutinize such a combination, according to Allen Grunes, a former Justice Department antitrust lawyer who is now with the Konkurrenz Group, a Washington-based advisory firm that counsels businesses on competition, privacy and consumer protection law.
“It’s going to get a very close look,” Grunes said. “Issues that may not have been present in the previous deal could arise, such as how the companies price.”