Antitrust Chatter Continues To Dog Staples-Office Depot Deal

Chatter about possible intervention on the part of the Federal Trade Commission in the proposed merger between Staples, Inc. (NASDAQ: SPLS) and Office Depot, Inc. (NASDAQ: ODP) first announced in February, continues. The proposed deal, initially valued at $6.3 billion, received broad approval from Office Depot shareholders. Staples had been the subject of lobbying by activist investor Starboard Value, who vigorously encouraged such a deal.

After news of the proposed takeover of Office Depot was first announced, shares of Staples traded as high as $19.40; SPLS shares closed at $14.41 last night, 25 percent below those, now seemingly giddy, post-merger news levels. Shares of Office Depot traded as high as $9.77 immediately after the news was announced. Last night, Office Depot shares closed at $7.84, close to 20 percent lower.

Deal Currently Values Office Depot Shares at $10.40

The deal involves $7.25 in cash and 0.2188 shares of Staples stock for each share of Office Depot stock, currently valuing Office Depot shares at $10.40 each. The Office Depot closing price of $7.84 last night represents a 24.6 percent discount on a stock that that is supposed to be acquired for $10.40 (at current prices) before the end of the year – something doesn’t sound quite right.

This wide price-spread between the two indicates apprehension on the part of market participants. While some, as reported by the South Florida Business Journal, such as Scott Tilghman with B. Riley and Co., have commented on the similarities between the Office Depot-OfficeMax merger in 2013 and his belief that the market will continue to punish the shares of both Office Depot and Staples, and that at some point, after shares are much lower, the FTC will relent and allow the deal to go through. Tilgham remarked, “If we go back to the OfficeMax-Office Depot merger… over the summer months, shares for OfficeMax began to trade off because people thought the deal wasn’t going to get done.”

The American Antitrust Institute has urged the FTC to “carefully scrutinize” the Staples-Office Depot deal. AAI President Diana Moss was quoted.

“This is a watershed deal for antitrust. The proposed merger raises a number of threshold questions. If the government is faced with a merger to monopoly of the office supply superstores, the AAI wants to make sure those get addressed.”

Doubts regarding the legality of the proposed entity abound. Daryl Boehringer, an analyst with Cleveland Research Company, says that he is “skeptical” in regard to the deal’s prospects and that the transaction being halted is the most “probable outcome.”

This isn’t the first time Staples and Office Depot have proposed combining forces: in 1997, a much smaller combined Staples-Office Depot entity was proposed and blocked by a United States District Court in an action started by the FTC. The possibility of a Staples-Office Depot merger passing regulatory hurdles continues to be the subject of hot debate.

On August 4, Office Depot reported its second quarter 2015 financial results, which included in-line earnings per Office Depot share of $0.06 and gross revenues of $3.44 billion. Staples is set to report its second quarter 2015 earnings on August 19.

[Photos by Joe Raedle / Getty Images]