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February 20, 2013

Office Depot to Acquire OfficeMax for $1.2 Billion in Stock

By Amanda Ciccatelli, TMCnet Web Editor

In an effort to step up competition against the likes of Staples (News - Alert) and Amazon, Office Depot Inc. is buying rival OfficeMax Inc. for $1.17 billion in an all-stock deal. This news comes as both companies face pressure from investors to boost profitability and lift shares.

Office Depot will issue 2.69 new shares of common stock for each outstanding common share of OfficeMax. To date, the deal is valued at $13.50 per share, or $1.17 billion, based on 86.7 million shares outstanding as of October 26. Analysts say the merger, which would combine the second and third largest office-supplies retailers into a more profitable, more competitive business, makes them better position for regulatory approval than the 1997 bid by Staples to purchase Office Depot. 

In fact, office supply retailers, often seen as reflecting economic health, have suffered as demand for their products fell in the years after the last recession, which caused companies to cut spending. Since the office supply business has become tough, Office Depot reported a fourth-quarter net loss, hurt by a six percent decrease in comparable sales at its North American stores and a revenue drop at its unit that serves North American businesses. Additionally, companies are facing competition from Amazon and Wal-Mart Stores that sell everything from pens and notebooks to furniture and break room supplies to government, businesses and individuals.

This offer represented a premium of just under four percent to OfficeMax's $13 close. It was not clear if that was enough to satisfy one of the company's largest shareholders, Neuberger Berman, which said earlier this week it would support a deal depending on the terms. OfficeMax shares rose 9.2 percent to $14.20 in premarket trading, while Office Depot was up 10 percent at $5.52.

The deal will also give Office Depot and OfficeMax a chance to save hundreds of millions of dollars by closing stores, cutting advertising costs and streamlining the supply chain. Industry experts have hoped for a while that Office Depot would merge with OfficeMax to take on Staples, which boosted its international business with suppliers by buying Dutch rival Corporate Express in 2008.

"Clearly, you can't make this deal work unless you close a bunch of stores," BB&T Capital Markets analyst Anthony Chukumba said. "Store rationalization is long overdue, and Staples will clearly benefit from just having fewer stores to compete with."

According to Euromonitor International, Staples has 39.9 percent of the U.S. office supply market, Office Depot 19.2 percent and OfficeMax holds 15.7 percent.

Edited by Ashley Caputo
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