Shares of both Staples, Inc. SPLS and Office Depot, Inc. ODP plunged 13.8% and 15.8%, respectively, yesterday, after the Federal Trade Commission (“FTC”) filed a lawsuit to block the merger of the office-supply retailers fearing that this $6.3 billion deal would reduce competition nationwide and result in price hikes and fewer options for large corporates who usually make bulk purchases.
In response, both Staples and Office Depot agreed to challenge the FTC’s decision, and hinted that the merger would help generate net synergies in excess of $1 billion over the three-year integration period. They further added that the deal would help lower prices, make product and technology advancements, and drive growth in categories beyond office supplies.
Both companies argued that competition has intensified in the office supplies space due to the entry of new players which the FTC should consider as it did during the approval of Office Depot's buyout of Office Max in 2013. The companies also intend to divest over $500 million in commercial business – which is being seen as an attempt on their part to conclude the transaction. However, the proposal failed to arouse the FTC’s interest.
Industry experts in favor of the deal believe that synergies from the merger will help the combined entity to effectively compete with mass merchandisers like Wal-Mart Stores Inc. WMT and online retailers like Amazon.com Inc. AMZN, which have now expanded into the office supplies sector. Also, this combination will help attain cost synergies and provide consumers with a better omni-channel platform.
We note that Staples and Office Depot have been interested in the deal for a very long time as the merger was proposed 18 years ago as well. However, the proposal was rejected by the FTC at that time too, after being slammed as anticompetitive.
Currently, both Staples and Office Depot carry a Zacks Rank #3 (Hold).
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