Office Depot to buy OfficeMax for $1.17 billion in stock

Office Depot Inc. agreed to buy OfficeMax Inc. for $1.17 billion in a bid to revive a retailer that has been losing sales to online rivals and Staples Inc., the largest U.S. office-supplies chain.

Office Depot will issue 2.69 new shares for each outstanding OfficeMax common share, the companies said today in a statement. Based on Office Depot’s closing price yesterday, that values OfficeMax at $13.50 a share, 26% higher than it closed at on Feb. 15, before reports the companies were in talks to combine. The deal was announced prematurely before the market opened on Office Depot’s website, according to a person familiar with the situation. The release was then removed.

The merger will combine companies with revenue of about $18 billion, compared with Staples’ more than $24 billion in sales last year. The company may accelerate the closing or selling of hundreds of stores after Starboard Value LP, an activist fund that became Office Depot’s largest shareholder in September, pushed for expense reductions.

“Consolidation is needed in an overstored and secularly declining industry,” Greg Melich, an analyst at International Strategy & Investment Group LLC in New York, wrote in a note Feb. 19. “We see two fundamental shifts that continue to hurt demand: Digitization of the workplace (that is reducing the demand for traditional office products) and a shift to e-commerce.”

Office Depot, based in Boca Raton, Florida, fell 4% to $4.82 at 10:13 a.m. in New York. Naperville, Illinois-based OfficeMax rose 6.2% to $13.81.

New Board

The new company’s board will include an equal number of directors designated by Office Depot and OfficeMax, the companies said. The board will conduct a search for a chief executive officer. Both incumbent CEOs, Neil Austrian at Office Depot and OfficeMax’s Ravi Saligram, will be considered.

The merger may generate as much as $600 million in cost savings in three years, the companies said. The new company also would have more than $1 billion in cash on hand and another $1 billion available in a credit revolver. The deal is expected to close by the end of the year.

JPMorgan Chase & Co. advised OfficeMax. Peter J. Solomon Co. and Morgan Stanley served those roles for Office Depot.

Starboard Chief Executive Officer Jeffrey Smith wrote a letter to Austrian on Sept. 17 arguing that the retailer’s “poor operating performance” has hurt the stock. Smith, whose firm owns more than 14% of the chain, recommended smaller stores carrying fewer items. It also should cut general expenses and lower advertising costs, he said.

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