Will Regulatory Troubles Ruin Staples-Office Depot Merger?

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The much anticipated merger between office supply retailer, Staples, Inc. SPLS and its rival Office Depot, Inc. ODP seems to be in a jam. The deal is facing regulatory hassles both in the U.S. and EU.

There are speculations that the Federal Trade Commission (FTC) in the U.S. will oppose the merger. We note that the merger of Staples and Office Depot would leave the U.S. with one major office-supply chain and hence, the regulatory issues. The FTC has been studying the impact of the merger for quite some time now.

In Feb 2015, Staples had announced that it will acquire rival Office Depot in a multi-billion dollar deal. Last month, both Staples and Office Depot furnished additional documents and information to the FTC, complying with the commission’s “second request." Both the companies agreed to “substantial compliance” and provided information regarding Staples’ $6.3 billion buyout of Office Depot. The companies continue to work in tandem with the Fed regulators.

In EU, the scenario seems to be the same. Reportedly, the EU regulators have opened a thorough investigation into the antitrust impact of the abovementioned merger. The regulators have warned that the deal could eradicate important competition which will lead to price increases and less choice for customers.

Ron Sargent, CEO of Staples said, “We continue to work cooperatively with the European Commission regarding the acquisition of Office Depot”.

The two companies would create a retail chain with approximately $39 billion in revenues and thousands of stores. We note that this idea is not a new one as the same was proposed 18 years ago but was dismissed by the FTC at that time, after being slammed as anticompetitive.

However, a changing consumer landscape is pushing it forward this time, as office supply retailers are facing increasing competition from companies like Wal-Mart Stores Inc. WMT and Amazon.com Inc. AMZN.

The merger transaction has already received approval from regulatory authorities in Australia, New Zealand and China, while shareholders of Office Depot gave a thumping approval to the takeover at the company’s Annual Meeting of Shareholders held on Jun 19.

At present, both Staples and Office Depot carry a Zacks Rank #3 (Hold).

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