Staples said Wednesday that it reached a deal to acquire Office Depot’s outstanding shares for $7.25 in cash and 0.2188 of a Staples share. Based on Staples’ closing price on February 2, the deal values Office Depot at $11 per share, a 44% premium over the company’s closing price on February 2, the day before media speculation broke out and sent Office Depot stock for a nearly 22% surge. All told, the transaction has a value of $6.3 billion.
Staples, which first tried to merge with Office Depot in 1997 but was blocked by an antitrust regulator, said that it and Office Depot had been in acquisition talks since September 2014. It was around this time that the FTC decided not to make Office Depot divest any stores in its merger with OfficeMax , a move that many analysts took as sign that a Staples-Office Depot merger could, at long last, go through. This was also four months before Staples’ activist investor, Starboard Value, would issue a letter to the Staples board urging an Office Depot acquisition. “For a variety of reasons, we believe that now is the right time to pursue such a transaction, and we urge you to immediately retain a reputable investment bank and legal advisors to assist the Board in evaluating, structuring and executing a transaction with Office Depot,” the firm wrote in January.
Not only did Starboard get its wish, but the deal is expected to close by the end of this calendar year. Staples estimates that the merger will give it pro-forma annual sales of roughly $39 billion.
“This is a transformational acquisition which enables Staples to provide more value to customers, and more effectively compete in a rapidly evolving competitive environment,” Ron Sargent, Staples chairman and CEO who will remain chairman and CEO after the deal’s completion, said in a statement Wednesday morning. “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.”
Added Office Depot chairman and CEO Roland Smith: “This transaction is 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.”
Indeed, Office Depot only just merged with OfficeMax in 2013, and on Wednesday Staples said that between now and when its merger with Office Depot closes, Office Depot will continue to focus on its integration of OfficeMax.
Upon the close of the deal, Staples’ board of directors will grow from 11 people to 13 to make room for two Office Depot-nominated directors. Staples’ headquarters will remain in its current location of Framingham, Massachusetts.
In a research note released Wednesday morning following a call between Staples and Wall Street analysts and investors, Citibank analyst Kate McShane said that the companies aren’t planning on changing their existing store closure plans. However, McShane and her team thing that “store closings are likely to be announced down the road once the deal is approved by the FTC and closed.” Noting that half of the combined store base is within a 5-mile radius, McShane estimates that as many as 500 locations could be closed in addition to the 400 locations Office Depot is closing and the 225 closures Staples announced in 2014.
Citi has Staples rated as neutral with an $18 per-share target price.
Following the confirmation of the deal, shares of Staples fell more than 7% in Wednesday’s pre-market trading session; the stock is currently down 7.4%. Office Depot, meanwhile, ticked up 2.9% on the news. This is a far cry from the two companies’ stock movements on Tuesday, when merger rumors sent Staples for a 10.9% gain and Office Depot for a nearly 22% surge; Staples’ volume was nearly triple that of a normal day on the market and Office Depot was trading at nearly 7 times its normal volume. Now that the rumors are no longer rumors, the stocks seem to be falling in line with the usual, “long the target, short the acquirer” movement.
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