Office Depot to buy Office Max as an attempt to compete with Staples.
Office Depot Inc. and Office Max Inc. have agreed to merge in a $1.17 billion stock transfer, the companies announced Wednesday, ending nearly two hours of confusion about whether a deal had been reached.
Officials at Naperville-based OfficeMax and Office Depot declined to say who would lead the combined company nor where it would be located when the "merger of equals" is completed, likely by the end of the year.
After some confusion early Wednesday, when a draft press release was posted prematurely on the website of Boca Raton, Fla.-based Office Depot's, both companies issued a joint statement at around 8:30 a.m. CT announcing the planned merger.
The combined entity's name, headquarters and CEO are all undecided, creating an unusual level of uncertainty that points to the integration challenge the companies face.
"During the appropriated times ... our board will make the right decision," OfficeMax President and CEO Ravi Saligram said of the location and leadership of the combined firm. "Now we're independent companies and we've got to go through lots of processes," he said.
On a conference call with analysts, Office Depot CEO Neil Austrian apologized for the announcement mishap on Wednesday morning. "Our webcast provider inadvertently released our earnings in advance of schedule," he said. We regret any inconvenience that this may have caused."
Saligram and Austrian emphasized that the combination, which will create a company that will do roughly $18 billion in revenue, is a merger of equals.
"This [merger] will create a stronger, more global, more efficient competitor able to meet the growing challenges a rapidly changing industry," said Saligram.
While Office Depot insisted the deal was a merger of equals and not an acquisition, its shareholders will get the larger part of the combined company. CEOs of both companies and outside candidates are being considered for the top job.
When combined, OfficeMax and Office Depot, the world's second and third largest office products companies by revenue, will still not eclipse the segment's largest business, Staples Inc.
The pair had combined revenue of about $18.5 billion in the last fiscal year. They expect to save about $400 million to $600 million per year within three years through layoffs, streamlining of back-office functions and combined advertising. They didn't provide details on how many workers would lose their jobs or the fate of OfficeMax's Naperville headquarters.
After days of speculation that a deal was close, a draft of a press release announcing the news was posted prematurely on Office Depot's website early Wednesday morning. More than an hour after it came out, there was still no mention of the merger on either company's website nor on the SEC or other investor websites. Sources cited by the New York Times Wednesday morning said negotiations were ongoing.
Thomson Reuters Corporate Services, which operates various investor relations websites including Office Depot's, took responsibility for the early publication.
"Unfortunately, Thomson Reuters incorrectly posted this morning's announcement of Office Depot's intention to merge with Office Max prior to its intended release," Lemuel Brewster, PR director - investors at Thomson Reuters, said Wednesday afternoon in an email response to an inquiry. "We regret this error and are taking all steps necessary to enhance our processes and controls to ensure this does not happen again."
Office Depot will issue 2.69 new shares of common stock for each outstanding common share of OfficeMax. At Tuesday's closing prices, the deal is valued at $13.50 per share, or $1.17 billion, based on 86.7 million shares outstanding as of Oct. 26.
After the merger is completed, Office Depot's board will consist of an equal number of directors chosen by that company and OfficeMax.
Although the actual announcement didn’t go as planned, the deal has been rumored for years as the struggling office supply sector deals with fickle consumers and businesses that are conserving costs and doing more online.
Analysts say they expect far less pushback from antitrust authorities for this deal than what Office Depot faced in the 1990s, when it tried to merge with Staples, given the changes in the office supply market since then.
Underscoring how tough that business has become, Office Depot reported a fourth-quarter net loss, hurt by a 6 percent decrease in comparable sales at its North American stores and a revenue drop at its unit that serves North American businesses.
Office supply retailers, which are often seen as reflecting overall economic health, have suffered as demand for their products fell in the years after the last U.S. recession led companies to cut spending.
They also face strong competition from the likes of Amazon and Wal-Mart Stores Inc in selling everything from pens and notebooks to furniture and break room supplies to government, businesses and individuals.
SMALL PREMIUM
The offer represented a premium of just under 4 percent to OfficeMax's $13 close. It was not immediately 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. Office Depot was up 10 percent at $5.52, meaning that OfficeMax was still trading below the value of the bid.
The deal, considered long overdue by many on Wall Street, will also give Office Depot and OfficeMax a chance to save hundreds of millions of dollars by closing stores, cutting advertising costs and streamlining their supply chain.
Industry experts have long hoped Office Depot would join hands with OfficeMax to take on Staples, which boosted its international business and clout with suppliers by buying Dutch rival Corporate Express in 2008.
BB&T Capital Markets analyst Anthony Chukumba said the Office Depot-OfficeMax combination would help Staples, however.
"Clearly, you can't make this deal work unless you close a bunch of stores," he said. "Store rationalization is long overdue, and Staples will clearly benefit from just having fewer stores to compete with."
Staples has 39.9 percent of the U.S. office supply market, Office Depot 19.2 percent and OfficeMax holds 15.7 percent, according to Euromonitor International.
Tribune reporter Samantha Bomkamp and Reuters contributed.
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