Staples to acquire Office Depot in cash and stock deal

Staples has entered an agreement to acquire Office Depot in a cash and stock deal valued at $6.3 billon that is sure to face a high degree of regulatory scrutiny.

Under the terms of the agreement, Office Depot shareholders will receive $7.25 in cash and 0.2188 of a share in Staples stock at closing. Based on Staples closing share price on February 2, 2015, the last trading day prior to initial media speculation around a possible transaction, the transaction values Office Depot at $11.00 per share, a premium of 44% over the closing price of Office Depot shares as of Feb. 2, 2015. Staples said it began discussions to acquire Office Depot last September.

“This is a transformational acquisition which enables Staples to provide more value to customers, and more effectively compete in a rapidly evolving competitive environment,” said Ron Sargent, Staples’ chairman and CEO. “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.”

The company can also expect federal regulators to look closely at the competitive implications of a deal that would essential bring to an end the era of the office superstore that began when Tom Stemberg founded Staples nearly 30 years ago. Stemberg tried to buy Office Depot in 1997 but that deal was scuttled after a lengthy battle with the Federal Trade Commission. Since then, the industry has undergone total consolidation among operators of retail stores and contract and commercial operations with the biggest most recent deal involving Office Depot’s acquisition of OfficeMax in late 2013. If Staples acquisition of Office Depot secures antitrust clearance it will be acquiring a company that hasn’t yet fully realized the synergy benefits of the acquisition of OfficeMax.

That's a big “if” and notably absent from the press release announcing the deal was any expression of confidence on the part of Sargent concerning prospects for regulatory approval or disclosure of a break-up fee that would be paid to Office Depot if the deal doesn’t go through.

“This transaction delivers great value for our shareholders and creates a company ideally positioned to serve our customers and grow over the long term,” said Roland Smith, chairman and CEO of Office Depot. “It is also an endorsement of our many accomplishments and the tremendous success we’ve had integrating Office Depot and OfficeMax over the past year. We look forward to bringing our experience and knowledge to the new organization.”

Staples expects to generate at least $1 billion of annualized cost synergies by the third full fiscal year post-closing with the majority of the synergies realized through job cuts and efficiencies in purchasing, marketing, and supply chain and store closings, or what Staples calls, “retail store network optimization.”