Staples’ Bid Rejected By FTC With No Counteroffer: Fate Of Office Depot Merger Uncertain

On Monday, Staples, Inc. (NASDAQ: SPLS) issued a press release stating that the Federal Trade Commission had rejected its proposal to divest $1.25 billion in “commercial contracts” in a bid to win the favor of the commission in the company’s proposed merger with Office Depot, Inc. (NYSE: ODP). Reportedly, no counteroffer was forthcoming from the FTC.

Staples had previously offered to divest $600 million in supply contracts with office supply wholesaler Essendant, as reported by Investor’s Business Daily.

In February, Staples announced its intention to acquire Office Depot in a deal valued at more than $6 billion, as reported by the Inquisitr. The deal, reported to have been first proposed by activist investor Starboard Value, stipulated that ODP shareholders would receive 0.2188 SPLS shares plus $7.25 in cash. In early August, this valued ODP shares at $10.50 each.

Office Depot and Staples propose merger looks set to be rejected by the FTC. [Photo by Joe Raedle/Getty Images]With yesterday’s closing price of SPLS shares at $9.39, the terms of the deal announced almost a year ago value ODP shares at $9.30, more than $1, or close to ten percent, below their worth just six months ago. Further, ODP shares closed on the New York Stock Exchange at $5.33, or more than 42 percent below the proposed buy-out price in a deal that was originally said to be expected to close by the end of 2015. This widening spread between the actual price of ODP shares and the buyout price reflects a seeming lack of confidence of market participants that the FTC will permit the deal to proceed.

The market for King Digital Entertainment plc (NYSE: KING) stock, by comparison, has been more typical of one for which a takeover bid has been announced. The market appears confident that the deal will proceed. Shares of King closed at $17.91 yesterday, $0.09 below the proposed buyout price of $18.00, as reported by the Inquisitr. This narrow spread between the market and the proposed acquisition price suggests confidence on the part of investors, unlike in shares of Office Depot.

“Staples’s and Office Depot’s own documents state that they are the only participants in a ‘two player’ national market,” a December 7 release from the FTC was quoted. Backers of the deal contend that competition from online retailers and discounters like Wal-Mart Stores Inc. (NYSE: WMT) and Costco Wholesale Corporation (NASDAQ: COST) necessitate a merger. Technological changes, such as “digital processing and cloud storage” solutions employed by customers have also been cited as reasons a Staples-Office Depot union is necessary.

Staples, SPLS, and Office Depot, ODP, shares have performed poorly on news of the FTC's rejection of proposals. [Stock Chart Courtesy of Venngage]“Staples’ Board of Directors and management team have worked tirelessly to complete the transaction,” Staples’ management said in its statement. “The company is still willing to continue negotiations with the FTC to reach a settlement that addresses FTC concerns… At the same time, Staples is pursuing the transaction through litigation. The company is confident in its legal position and looks forward to a full and impartial judicial review of the matter.”

Office Depot acquired Office Max in 2013, as reported by the Inquisitr, turning the office supply market into the two-player game it is seen as today.

Other mergers blocked in 2015 include one between U.S. Foods, Inc. and Sysco Corporation (NYSE: SYY), as well as Electrolux AB’s (OTC: ELUXY) proposed acquisition of General Electric Company’s (NYSE: GE) household appliances unit.

Both SPLS and ODP shares have slid toward repeated new 52-week lows as more time passes without approval from the FTC and investor confidence in the deal proceeding appears to diminish. Shares of Office Depot are down close to 40 percent over the past 12 months; Staples’ shares are down close to 50 percent. Over the same period the Dow Jones Industrial Average (^DJI) has lost 4.3 percent of its value and the NASDAQ Composite Index has gained 4.3 percent.

In 1997, a merger was proposed between Staples and Office Depot, which would not have resulted in the resulting company dominating the entire office supply industry, and it was blocked.

[Photo by Joe Raedle/Getty Images]