Office Depot, OfficeMax said to be near merger deal

LITTLE ROCK — Office Depot Inc. and OfficeMax Inc. are discussing a merger with a deal possible this week, said a person familiar with the matter.

The companies have been discussing a potential stock swap that would create a single office-supply retailer to compete with Staples Inc., said the person, who asked not to be identified because the talks are private. Office Depot, the second-largest office-supplies retailer in the U.S., has been exploring options since September, when activist fund Starboard Value LP became its largest shareholder.

A merger would create a company with almost $18 billion in revenue, compared with $25 billion in revenue last year for Staples. A deal also could be a victory for Starboard, which has been pushing Office Depot to create value for shareholders. The shares had declined about 90 percent from a peak in 2006.

Office Depot shares surged 9.4 percent to close Tuesday at $5.02. OfficeMax Inc. shares rose 21 percent to close at $13.

Office Depot closed Friday at $4.59 in New York, down from a peak of $44.46 in May 2006. That gave the company a stock-market value of $1.31 billion, more than Office-Max’s value of $932.5 million based on last week’s $10.75 closing price.

Starboard Chief Executive Officer Jeffrey Smith wrote a letter to Office Depot Chief Executive Officer Neil Austrian on Sept. 17 arguing that the retailer’s “poor operating performance” has hurt the stock. Smith, whose firm owns 13 percent of the chain,recommended smaller stores carrying fewer items. It also should cut general expenses and lower advertising costs, he said.

While Starboard would support the idea of a merger, the firm would need to see terms of the deal before approving anything proposed between the two retailers, said a person familiar with that matter.

Julie Treon, a spokesman for Naperville, Ill.-based OfficeMax, wouldn’t confirm merger talks.

“There have been rumors for a while about consolidation in the marketplace,” Treon said by phone. “It’s also been our policy not to comment on market rumors or speculation.”

Brian Levine, a spokesman for Boca Raton, Fla.-based Office Depot, declined to comment in an e-mail. The Wall Street Journal reported the talks Monday on its website.

A combination may generate as much as $580 million in cost savings, Daniel Binder, an analyst for Jefferies & Co. in New York, wrote in a note to clients. Both chains have been closing locations and that trend would accelerate with a merger as about 50 percent of their store territories overlap, he said.

The combined OfficeMax and Office Depot may close or sell as many as 600 locations, giving Staples an opportunity to increase sales in those areas, Gary Balter, an analyst for Credit Suisse Group AG in New York, wrote Tuesday in a note to clients. Staples Inc. shares rose 13 percent to $14.65.

Staples had 2,295 stores worldwide as of Jan. 28, 2012. In statements earlier this month, Office Depot said it had about 1,675 global locations and OfficeMax said it had about 900 stores in the U.S. and Mexico.

Any deal struck may be challenged by the Federal Trade Commission, said David Balto, an antitrust attorney in Washington who was the FTC’s director of policy for six years ending in 2001. He worked on the FTC’s lawsuit that stopped Staples from acquiring Office Depot in 1997.

Balto said reducing the number of big-box office retailers from three to two may be viewed as anti-competitive, just as it was back then. In addition, the Obama administration has been tough about enforcing antitrust laws, he said.

“They are facing a stiff wind,” Balto said. “You have three players right now and they want to reduce it by one. That rivalry results in better pricing and services for consumers.”

The industry has “dramatically changed” since 1997 with consumers having more choices since the emergence of online competitors such as Amazon.com Inc., Binder said in the same note. It is these competitors and the digitization of the office that can no longer support three national office-supply chains, he said.

As small businesses, the main customer of all three chains, shifted to using fewer pens and filing cabinets, the companies have broadened their selection into technology products such as software, tablets and smart phones. The chains have also branched out into offering more services such as copy printing and computer repair.