Staples acquires rival Office Depot for $6.3 bn

Leading US office supplies retailer Staples Inc is buying rival Office Depot Inc in a deal valued at $6.3 billion, aiming to compete with bigger e-commerce rivals such as Amazon and eBay.

Staples will acquire all the outstanding shares of Office Depot by paying $7.25 in cash and 0.2188 shares of Staple stock for each Office Depot share.

The deal values Office Depot at $11 per share, or $6.3 billion based on Staples' closing price on 2 February, the last trading day prior to media speculation about a possible transaction, and represents a 44-per cent premium over the closing price of Office Depot on that day.

Florida-based Office Depot, formed through the merger of Office Depot and OfficeMax in 2013, is a leading global provider of products and services for workplaces. The company employs over 58,000 people and serves customers in 57 countries.  It has 2,000 retail stores and e-commerce sites operated directly, through joint ventures, franchisees and partners (See: Office Depot to buy smaller rival OfficeMax for $1.2 bn).

Office Depot offers products under various labels, including Office Depot, OfficeMax, Viking Office Products, Foray, Ativa, Grand & Toy, TUL and DiVOGA.

For the quarter ended September 2014, the company reported a net income of $29 million on revenue of $4.1 billion.

Staples, headquartered in Massachusetts, is a leading retailer of office supplies, technology, furniture, safety supplies, medical supplies, copy and print services. The company operates throughout North and South America, Europe, Asia, Australia and New Zealand and its annual turnover is around $23 billion.

Through the combination, Staples expects sales of around $39 billion annually which will be driven through growth in its delivery businesses and categories beyond office supplies.

Staples' chairman and chief executive officer Ron Sargent said, ''This is a transformational acquisition which enables Staples to provide more value to customers, and more effectively compete in a rapidly evolving competitive environment.''

"We expect to recognize at least $1 billion of synergies as we aggressively reduce global expenses and optimize our retail footprint. These savings will dramatically accelerate our strategic reinvention which is focused on driving growth in our delivery businesses and in categories beyond office supplies," Sargent further stated.

The deal brings an end to nearly four months of negotiations between Staples and Office Depot. Boards of directors of both the companies have unanimously approved the deal.

Starboard Value, the New York-based activist investor which has stakes in both retailers had demanded to explore a possible merger, which it expected, would bring cost savings of up to $2 billion. Starboard owns about 6 per cent in Staples and close to 10 per cent in Office Depot.

The transaction is expected to close by the end of 2015, subject to regulatory approvals and customary closing conditions.

The deal will come under the scrutiny of US anti-trust authorities.  However, it is believed that under the present environment with growing competition from e-commerce companies, they could take a more positive look on the merger.

In 2013, the Federal Trade Commission (FTC) had approved the deal between Office Depot and OfficeMax. But now, it will examine how consumers will be affected by bringing the industry to one chain.

The $1 billion in synergies is expected to be achieved by the third full fiscal year post closing through reduction of personnel and administrative expenses, efficiency improvement in purchasing, marketing and supply chain, retail store network optimisation.

Staples expects to incur a one-time cost of $1 billion to achieve the synergies. The transaction is expected to be accretive to Staples' earnings in the first year of closing.

The combined entity will be headed by Staples' chairman and chief executive officer Ron Sargent.

To fund the deal, Staples has arranged a $3-billion credit facility from Barclays and BofA Merrill Lynch and a $2.75-billion term loan.

The company said that it has temporarily suspended its share buyback programme to focus on paying down transaction related debt, but is committed to maintaining its quarterly dividend of $0.12 per share.

Barclays is acting as exclusive financial advisor to Staples on the transaction while Office Depot is advised by Peter J. Solomon.