(The author is a Reuters Breakingviews columnist. The opinions
expressed are his own.)
By Christopher Swann
NEW YORK, Feb 19 (Reuters Breakingviews) - Office Depot
ODP.N and OfficeMax OMX.N are lucky to have each other.
Uniting the U.S. purveyors of pens, paper clips and printer
toner is about as obvious as it gets in M&A. The potential
synergies could be worth more than the market value of the two
companies combined. As the Internet ravishes retail, at least
this corner can cling to life by merger.
Consolidation is overdue. The encroaching power of the likes
of Amazon (AMZN.O) and Target (TGT.N) has been evident for
years. Office Depot and OfficeMax are also good partners. Plenty
of nearby stores could be closed and their own suppliers
squeezed. Based on past deals, savings of about 2.6 percent of
revenue, or some $450 million a year in this case, look
realistic, Sanford Bernstein analysts wrote in a prescient note
on Friday, ahead of weekend reports of the two companies being
These cost cuts, taxed and capitalized, would be worth about
$3 billion to shareholders. That's an impressive sum given the
two companies were only worth around $2.1 billion combined
before the merger talks were reported. Investors initially added
another $400 million on Tuesday as they anticipate details on a
possible all-share combination.
There will be questions about competition, of course.
Trustbusters ordinarily take a dim view of two top players
joining forces. In 1997, regulators scotched a $4 billion deal
that would have united market leader Staples (SPLS.O) with
Office Depot. Given the radically altered market dynamics 16
years later, however, it's hard to see a merger between numbers
two and three in sales as a powerful monopoly in the making.
OfficeMax is on track to generate a net margin of just 0.9
percent in 2013, according to the average estimates of analysts
collected by Thomson Reuters. Office Depot is seen struggling to
eke into positive territory. Revenue at the top three chains is
forecast to stagnate, but online competition could be harsher as
other specialty retailers like Blockbuster, Circuit City and
Borders learned. While Offices Max and Depot might together slow
the decline, their industry is still bound to die a death of a
thousand paper cuts.
SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS:
- Office Depot, the second largest U.S. office supply
retailer, is in advanced talks to merge with smaller rival
OfficeMax and a deal could come as early as this week, a person
familiar with the matter told Reuters in an article published on
- The deal is expected to be structured as a stock-for-stock
transaction, the person said. News of the talks had been
reported earlier by the Wall Street Journal.
- Before the report, market leader Staples (SPLS.O) had a
market value of $8.7 billion, against $1.1 billion for Office
Depot and $930 million for Office Max.
- The Federal Trade Commission rejected a $4 billion merger
of Office Depot and Staples in 1997, saying it would lead to
less competition and higher prices for customers.
- Reuters: Office Depot, OfficeMax in talks to merge; deal
seen soon [ID:nL1N0BI52Q]
- For previous columns by the author, Reuters customers can
click on [SWANN/]
(Editing by Jeffrey Goldfarb and Emily Plucinak)
Keywords: BREAKINGVIEWS OFFICEDEPOT/OFFICEMAX
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