--No. 2 and 3 office-supplies retailers agree to combine into
company with $18 billion in annual sales
--Executive management to be determined by search committee
--Deal expected to close this year if shareholders, antitrust
officials approve
(Updates with details from conference call and analysts
throughout.)
By Joan E. Solsman
For a merger the market has envisioned for years and expected
this week, the combination of office-supply stores Office Depot
Inc. (ODP) and OfficeMax Inc. (OMX) still came a little sooner than
either company planned.
Initially unveiled Wednesday in a premature Office Depot
earnings report, the merger of the No. 2 and No. 3 office-supplies
retailers behind Staples Inc. (SPLS) is seen as an overdue
consolidation that could benefit all three. But excitement about
the potential benefits was tempered by a paucity of basic
statistics about the resulting company, including who would lead
it, where it would be based and what it would be called.
Office Depot agreed to merge with smaller rival OfficeMax in an
all-stock deal that values OfficeMax at roughly $1.19 billion and
creates a retailer with $18 billion in sales. The companies called
the transaction a "merger of equals" in a joint press release that
followed more than two hours after the accidental release from
Office Depot, which the company said may have been inadvertently
caused by its webcast operator.
Shares of Office Depot recently slid 16% to $4.20, while
OfficeMax shares fell 5.9% to $12.23. That follows 9.4% and 21%
jumps in their respective shares on Tuesday. The Wall Street
Journal reported earlier this week that OfficeMax and Office Depot
were in advanced talks to merge.
The deal combines two companies in the midst of their own
turnaround plans to cope with a sector battling the effects of too
many stores, an increasingly digitized office and greater
competition from mass merchants and online sellers.
OfficeMax and Office Depot were getting a good deal out of the
combination, Credit Suisse analyst Gary Balter said. "Both
companies were struggling on their own, they needed to do this," he
said.
The $400 million to $600 million in expected cost savings were
in line with what analysts were expecting. B. Riley & Co.
analyst Scott Tilghman tabulates every $100 million in savings adds
a dollar to Office Depot's share valuation, at a time when the
stock is trading in the mid-$4 range. He added that all three
office-supply chains will benefit by their direct competition
getting streamlined to two players, giving the example of the need
for less-aggressive bids on big contracts.
But BB&T Capital Markets analyst Anthony Chukumba said
integration of the two is hard to conceive, especially without
knowing who will be leading the company.
The new company's executive management is still to be
determined. The combined company's board would form a selection
committee--both of which will have equal representation and
governance rights for Office Depot and OfficeMax--to search for a
chief executive. The panel will consider Office Depot Chairman and
Chief Executive Neil Austrian and OfficeMax CEO Ravi Saligram for
the top post, as well as outside candidates.
On a conference call to discuss the merger, leaders of both
companies said they didn't want to name a chief executive before
the merger had necessary approvals from stockholders and
regulators. If it receives those, the merger is expected to close
by year's end.
They said the move was a lesson from history. In the late 1990s,
Staples and Office Depot put their independent operational
strategies on the backburner as they worked on their own
combination, which set them back after the Federal Trade Commission
blocked Staples takeover of the company.
While Mr. Chukumba said it was helpful to hear the company's
confidence about getting FTC approval and explanation for not
naming a CEO, "that still doesn't stop a whole bunch of Office
Depot and OfficeMax people from updating their resumes."
Analysts generally thought OfficeMax's Mr. Saligram as the one
likely to emerge as chief of the combined company, based on his
enthusiasm for the sector, his success thus far turning around
OfficeMax and his age, as Mr. Austrian is nearly 20 years his
senior.
Under the companies' definitive agreement, Office Depot will
issue 2.69 new shares--valuing OfficeMax at $13.50 a share based on
Tuesday's close--for each OfficeMax share outstanding. The
stock-swap value is a 3.8% premium to Tuesday's close of $13.
Office Depot, based in Boca Raton, Fla., has about 1,675 stores
world-wide, annual sales of some $11.5 billion and about 39,000
employees. OfficeMax, based in Naperville, Ill., has about 900
stores in the U.S. and Mexico, roughly $7 billion in annual sales
and about 29,000 employees.
The companies didn't say Wednesday what the merged company would
be called, where it would be based or how many people would work
there.
Office Depot has been under pressure from activist hedge fund
Starboard Value LP, which disclosed holding a sizable stake in
September and has pushed the company to accelerate cost-cutting and
take other steps to improve profitability. In October, Office Depot
adopted a shareholder-rights plan, or "poison pill," that is
designed to deter hostile takeovers.
OfficeMax also has encountered calls for change from a large
shareholder. Asset-management firm Neuberger Berman, which holds a
roughly 5% stake, has called on the company to return more capital
to investors.
Wednesday, both Office Depot and OfficeMax released fourth
quarter earnings. Office Depot swung to a loss on declining
revenue, with both results below analysts' average estimates.
OfficeMax said it had swung to a fourth-quarter loss as revenue
fell and expenses jumped.
--Melodie Warner and Saabira Chaudhuri contributed to this
article.
Write to Joan E. Solsman at joan.solsman@dowjones.com
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