Office Depot agrees to buy OfficeMax in stock deal worth about $1.2 billion

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An OfficeMax store is pictured in Fairbanks, Alaska on May 1, 2007. THE CANADIAN PRESS/AP, Al Grillo

NEW YORK, N.Y. - 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 by helping the No. 2 and No. 3 chains compete against industry behemoth Staples.

The merger marks the first move toward consolidation in an industry that is bloated with stores. It reflects the changing retail landscape as "big box" stores have become outmoded and more people shop online.

"This combination will create a stronger, more global, efficient competitor able to meet the growing challenges of our rapidly changing industry," said OfficeMax CEO Ravi Saligram in a call with analysts.

Still, doubts remain whether the combination, which has been mulled over in the industry for years, is enough to offset growing competition and a changing retail landscape.

Liang Feng, a Morningstar analyst, said the companies will have a lot of obstacles to overcome to succeed.

"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 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.

For years, rumours 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 per cent market share, Office Depot has 26.1 and OfficeMax has 15.6.

The Wall Street Journal first reported the possibility of a deal between Office Depot and OfficeMax on President's Day on Monday, when markets were closed. That sent stock across the sector soaring on Tuesday when markets reopened.

Office Depot reported the terms of the deal in a release on its website early Wednesday morning. But then the company removed it, which caused some confusion.

In a call with investors, Office Depot CEO Neil Austrian said the error was due to the company's webcast provider inadvertently releasing the company's earnings release "well in advance of schedule," which included information about the deal. Thomson Reuters Corporate Services, which provides investor relations website services to Office Depot, took the blame for the slip and said it is taking steps to ensure it will not happen again.

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.

In the deal, Office Depot, based in Boca Raton, Fla., 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 per cent premium to OfficeMax's closing price of $13 on Tuesday and a 26 per cent premium to OfficeMax's closing price on Friday, before word of negotiations leaked out.

Even though Office Depot could hold 54 per cent of shares while OfficeMax holds 46 in a preliminary tally, the companies said characterizing the deal as Office Depot buying OfficeMax was wrong. Office Depot's Austrian said the deal is a "merger of equals."

The combined company's name, CEO and corporate headquarters are yet to be determined; both companies' CEOs are being considered for the top role. Both companies would have equal representation on the combined entity's board.

OfficeMax said the move is expected to result in $400 million to $600 million annually in cost savings by the third year of the deal. The combined company expects $350 million to $450 million in one-time costs related to the integration.

The deal, which is expected to be complete by the end of the calendar year, 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 that the combined company would have too much of a competitive advantage in the marketplace.

But OfficeMax CEO Ravi Saligram said the industry has changed so much since 1997 that the companies have a strong case for approval. Amazon was "embryonic" in 1997 and stores like Wal-Mart, Costco and Best Buy were not as big competitors as they are now, he said.

"It's a totally different landscape," he said.

Consolidation will likely be good for both companies. 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 per cent 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 per cent to $1.7 billion from $1.84 billion.

Office Depot shares fell 60 cents, or 12 per cent, to $4.42 in trading, while OfficeMax shares fell 24 cents to $12.76. Staples shares fell 58 cents, or 4 per cent, to $14.07.