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Originally published February 20, 2013 at 6:52 PM | Page modified February 20, 2013 at 7:53 PM

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Office Depot, Office Max to merge as industry changes

The retailers said Wednesday they have agreed to combine in an all-stock deal worth about $1.2 billion that would transform the office-supply retail sector by helping the No. 2 and No. 3 chains compete against behemoth Staples.

The Associated Press

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NEW YORK — Office Depot and OfficeMax are being collated.

The retailers said Wednesday they have agreed to combine in an all-stock deal worth about $1.2 billion that would transform the office-supply retail sector by helping the No. 2 and No. 3 chains compete against industry behemoth Staples.

The merger marks the first move toward consolidation in an industry bloated with stores. It reflects the changing retail landscape as “big box” stores have become outmoded and more people shop online.

“This combination will create a stronger, more global, efficient competitor able to meet the growing challenges of our rapidly changing industry,” said OfficeMax CEO Ravi Saligram in a call with analysts.

Still, doubts remain whether the combination, which has been mulled over in the industry for years, is enough to offset growing competition and a changing retail landscape.

Liang Feng, a Morningstar analyst, said the companies must overcome a lot of obstacles to succeed.

“The industry will face longer-term structural headwinds with competitors like Amazon, Costco gaining ground and the decline in demand for secular office products like paper, pens and ink,” he said.

Office Depot reported the terms of the deal on its website early Wednesday. Then the company removed it, which caused some confusion.

In a call with investors, Office Depot CEO Neil Austrian said the error was due to the webcast provider inadvertently releasing the company’s earnings news “well in advance of schedule,” which included information about the deal.

Thomson Reuters Corporate Services, which provides investor-relations website services to Office Depot, took the blame and said it is working to ensure it will not happen again.

In the deal, Office Depot, based in Boca Raton, Fla., and Naperville, Ill.-based OfficeMax said investors in OfficeMax will get 2.69 shares of Office Depot for each OfficeMax share.

Even though Office Depot could hold
54 percent of shares while OfficeMax holds 46 percent in a preliminary tally, the companies said characterizing the deal as Office Depot buying OfficeMax was wrong. Austrian said the deal is a “merger of equals.”

The combined company’s name, CEO and corporate headquarters are yet to be determined. Each company’s CEO is being considered for the top role.

Both companies would have equal representation on the combined entity’s board.

OfficeMax said the move is expected to result in $400 million to $600 million annually in cost savings by the third year of the deal. The combined company expects
$350 million to $450 million in one-time costs related to the integration.

The deal, expected to be finished by year-end, still faces shareholder and regulatory approvals. Office-supply mergers have been questioned by regulators in the past.

In 1997, Staples tried to buy Office Depot, but the Federal Trade Commission nixed the deal due to concerns the combined company would have too much of a competitive advantage.

Saligram said the industry has changed so much since 1997 that the companies have a strong case for approval. Amazon was “embryonic” in 1997 and stores like Wal-Mart, Costco and Best Buy were not as big competitors as they are now, he said.

“It’s a totally different landscape,” he said.

Consolidation will likely be good for both companies. Office Depot and OfficeMax have been hurt by restructuring costs and continued weak sales.

Office Depot, which has 1,675 stores worldwide, reported a loss of $17.5 million, or 6 cents per share, for the three months ended Dec. 29. Excluding one-time items, it broke even per share. Revenue continued to be weak, falling nearly 12 percent to
$2.62 billion.

OfficeMax, which has 900 stores in the U.S., reported a loss of $33.9 million, or
39 cents per share, as it spent money on a restructuring. Adjusted for one-time costs, however, profit was 16 cents per share. Revenue fell 7 percent to $1.7 billion from $1.84 billion.

Office Depot shares fell 60 cents, or
12 percent, to $4.42 in trading, while OfficeMax shares fell 24 cents to $12.76. Staples shares fell 58 cents, or 4 percent, to $14.07.

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