Office Depot and OfficeMax will combine in an all-share merger of equals forming the number two in office supplies and service solutions behind Staples. Both boards of directors officially approved the transaction Feb. 20 which will create an $18 billion revenue company.
“We are excited to bring together two companies intent on accelerating innovation for our customers and better differentiating us for success in a dynamic and highly competitive global industry,” said Ravi Saligram, President and CEO of OfficeMax.
OfficeMax shareholders will receive 2.69 Office Depot shares for each OfficeMax share they own, which values OfficeMax at $1.14 billion at the current Office Depot share price of $4.88 in early morning New York trading Feb. 20. The required 233 million shares will be newly issued by Office Depot, thereby diluting existing shareholders.
JP Morgan says a stock deal is the right decision: “An all stock deal … makes sense given the cost of the integration and uneven sales outlook for the industry. The combination of store closures and integration costs could be significant,” say the analysts.
A CEO for the combined company has yet to be named and board members from both companies will be involved in the search process. Both companies stress that it is a merger of equals with the new board of directors divided evenly.
From an operational point of view, the new company should achieve $400 million-$600 million in cost savings three years from the completion of the merger. The deal is expected to close at the end of 2013 and is pending shareholder and regulatory approval.
The deal might face opposition from the Federal Trade Commission (FTC), however, says Citigroup in a note. “The combination of the number two and three players in this space still has to be approved by the FTC, and that could be a hurdle. (Staples tried to buy Office Depot in 1997, but was blocked by the FTC).”
The deal is the third high profile M&A transaction in February, after Michael Dell’s bid to take Dell Inc. private for $24 billion and Warren Buffet’s acquisition of H.J. Heinz.
Shares in OfficeMax started to rally Tuesday Feb. 19 when the Wall Street Journal first reported on the deal. They jumped 23 percent from $10.75 Feb. 15 and added more on Wednesday Feb. 20, jumping as high as $14.50, before trading back down below $14.
Office Depot shares also rose on the initial Wall Street Journal report, rising from $4.50 Feb. 15 to $6.10 on Feb. 19. After the final conversion ratio became known, however, the shares dropped to $4.84 on Wednesday Feb. 20. It is likely that Office Depot shareholders think that issuing 2.69 shares for each OfficeMax share is too much and are therefore selling the shares.
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