Office products retailer Office Depot, Inc. (ODP) agreed Wednesday to acquire peer OfficeMax, Inc. (OMX) in an all-stock merger deal valued at about $1.2 billion. The merger will create an 18 billion global office solutions company in order to fight competition from market leader Staples, Inc. (SPLS) and Amazon.com, Inc. (AMZN).
The deal, unanimously approved by the boards of both companies, is expected to close by the end of calendar year 2013.
"Office Depot and OfficeMax share a similar vision and culture, and will greatly benefit from drawing on the industry's most talented people, combining our best practices and realizing significant savings. We are confident that this merger of equals represents a new beginning for our two companies and will allow us to build a more competitive enterprise for the long term," Office Depot Chairman and CEO Neil Austrian said.
The combination will help both companies to overcome the weak economic conditions, falling sales and rising online competition.
The deal will see OfficeMax stockholders receive 2.69 Office Depot common shares for each share of OfficeMax common stock they hold. The offer equates to about $13.50 per share, based on Office Depot's closing share price of $5.02, and represents a 3.8 percent premium to OfficeMax's closing share price of $13.00, both on Tuesday.
Deemed as a merger of equals, the combined company's newly constituted board of directors will include equal representation and governance rights from each of the two companies.
Meanwhile, the CEO of the combined company will be selected by a committee that will oversee the search process, with both incumbent CEOs, as well as external candidates being considered. The current CEOs will remain in their positions until the search process is completed.
The combined company's name, marketing brands and corporate headquarters location are expected to be determined following the appointment of the CEO for the combined company.
The deal could be shot down by antitrust regulators. An earlier attempt made for a merger between Office Depot and Staples was thwarted by regulators in the U.S. in 1997. Staples is the world's largest office products company, while Office Depot is the second-largest office products retailer in the U.S.
Boca Raton, Florida-based Office Depot operates nearly 1,700 global stores, generating annual sales of about $11.5 billion, while Naperville, Illinois-based OfficeMax operates about 900 stores in the U.S. and Mexico, generating about $7 billion in annual sales.
The merger of the two companies would lead to the consolidation of operations that would enable the companies to cut costs by eliminating or consolidating overlapping stores and workforce. The combined company is anticipated to generate annual synergies of $400 million to $600 million and improved cash flows.
Meanwhile, the merger also provides for OfficeMax to declare and pay to its common stockholders aggregate cash dividends of up to $131 million or $1.50 per common share before the closure of the deal. The payment of dividends would not affect the exchange ratio in the deal.
Office Depot has been exploring options since September after it came under pressure from activist hedge fund Starboard Value LP, which has been pushing the company to increase profitability and cut costs. Starboard, Office Depot's largest shareholder, had recently revealed a 14.8 percent stake in the company.
Following the stake revelation, Office Depot adopted a 'poison pill' in the form of a shareholder rights plan in October as a defense mechanism against hostile takeovers which will be triggered if any person or group acquires 15 percent or more of the company's common stock.
In Wednesday's regular trading session, ODP is trading at $4.88 down $0.14 or 2.79% on a volume of 37.72 million shares, while OMX is trading at $13.92, up $0.92 or 7.08% on a volume of 17.99 million shares.
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