Staples, SPLS, Office Depot, ODP, Deal Faces More Setbacks, Unlikely To Close In 2015

The proposed merger between Staples, Inc. (NASDAQ: SPLS) and Office Depot, Inc. (NASDAQ: ODP) now looks like it won’t be completed in 2015, as the two firms had originally hoped.

The U.S. Federal Trade Commission has been taking a closer look at Staples’ proposed $6.3 billion acquisition of Office Depot, reports Reuters, and the regulatory authority will likely “delay” its findings.

The Europe Commission was reported to be investigating the proposed takeover on September 25 and has stated that its decision to approve or stop the transaction will come before February 10, 2016, reports Seeking Alpha.

“The transaction could eliminate an important competitor and reduce the choice of suitable suppliers in already concentrated markets, which could lead to price increases,” officials with the European Commission were quoted.

When the proposed deal was first announced in February 2015, management of both companies hoped that it would be completed by the end of the year. The increased scrutiny cited as pushing back a closing date is also thought to give the management of both Staples and Office Depot a chance to “address any concerns” regulators have with the merger.

The deal proposed that ODP shareholders would receive $7.25 in cash and 0.2188 of an SPLS share. SPLS stock closed at $12.62 yesterday, which implies an ODP share value of $10.01. ODP shares closed at $6.59 yesterday, representing a 34.2 percent discount to the takeover price. As the Inquisitr previously reported in early August, when ODP shares carried a takeover value of $10.40, this discount appear larger than what would normally be expected from a target company and suggested that market participants were uneasy with the firms’ ability to see the transaction through, in light of regulatory hurdles.

Earnings estimates for both Staples and Office Depot have remained steady and both firms’ second quarter results were inline with Wall Street analysts’ consensus estimates. Office Depot is experiencing stronger, though more levered, EPS growth than Staples. Office Depot has a $3.61 billion market capitalization and $15.2 billion in revenue compared with Staples’ $8.1 billion market capitalization and $21.8 billion in revenues.

Interesting to note is that Office Depot’s revenue to market capitalization is 23.8 percent, while Staples’ is 37.2 percent. Adding Office Depot into the Staples fold would be an easy way for the firm to boost revenues, while possibly lowing the premium on SPLS shares.

For the current quarter, EPS is expected to fall 5.4 percent for SPLS shares, fall again 9.7 percent in the fourth quarter, fall by 4.2 percent for the full 2015 year, and then grow by 5.4 percent in 2016.

At Office Depot, the growth picture is a little rosier. For the third quarter, just ended, ODP EPS is expected to expand by 60.0 percent, and then again by 42.9 percent in the fourth quarter. For the full 2015 year, ODP EPS is expected to grow by 109.1 percent and then grow again by 26.1 percent in 2016.

The 2016 figures are calculated using the companies’ current structure, which could change quickly if regulators allow the transaction to proceed.

Despite the strong EPS growth, ODP stock is down 23.1 percent year-to-date and SPLS shares are down 30.4 percent, compared with a decline of 4.3 percent for the Dow Jones Industrial Average (^DJI).

While Office Depot has been experiencing strong EPS growth, its revenue growth has been lackluster. Sales are expected to fall 8.6 percent to $14.7 billion for 2015 and again (if the transaction does not proceed) by 3.0 percent to $14.2 billion in 2016.

The picture isn’t much different with Staples, where revenues are expected to fall 5.3 percent to $21.3 billion for 2015 and again by 0.8 percent to $21.1 billion in 2016.

Part of Office Depot’s lower valuation is likely the result of its higher debt load, which the company has effectively utilized with higher EPS growth. Office Depot carries a debt to equity ratio of 97.0 percent, while Staples’ is just 21.2 percent.

[Staples Photo by Joe Raedle / Getty Images — Office Depot Photo by Justin Sullivan / Getty Images — Stock Charts Courtesy Venngage]