Staples' $6.3B takeover of Office Depot may not save it
Grand & Toy, Office Depot fall to online sales and the paperless office
Staples has announced the $6.3 billion US takeover of rival Office Depot, creating the largest office supply business in U.S. and Canadian markets.
The combined company has annual sales of about $39 billion and operates in 25 countries, but the office supplies business is in trouble.
The two companies have been negotiating a buyout deal since September, as the shift to online sales and competition from big box retailers ate into their business.
The cash and stock deal offers Office Depot Inc. shareholders $7.25 in cash and 0.2188 of a share in Staples Inc. That values Office Depot at $11 per share, a 44 per cent premium on its share price on Feb. 2.
Doug Stephens, president of Retail Prophet, a Toronto-based retail industry consulting group says the office supplies business is set to get even more competitive.
People look online for office supplies
"Pretty consistently businesses and individuals are turning to online to order many of the things these companies sell," he told CBC News.
"And the second thing that is increasingly causing havoc is, at a certain level the things that they sell are not necessary. We’ve moved to a somewhat paperless environment. We don’t need as many hanging file folders and paper and printers and shredders."
Staples will be able to pick up Office Depot’s loyal customers and go to vendors and ask for better terms after the deal is cleared, Stephens said.
They're also likely to move more sales online and close stores, resulting in layoffs, he added.
But unless they change their business model, perhaps by offering services to small businesses and people setting up home offices, they may find themselves in trouble again in a few years as the office supplies sales plunge, Stephens said.
Regulators rejected Staples' attempt to buy Office Depot in 1997, citing antitrust concerns. But antitrust experts have said a deal could pass muster this time because of new competition from Amazon.com, which sells office supplies online and Wal-Mart, which has products in stores.
Staples and Office Depot are being undercut by these cheaper competitors and are backing away from bricks-and-mortar stores in an attempt to save costs.
Finding ways to cut costs
Staples says it will save $1 billion in costs annually within three years because of the deal, which will allow it to reduce its “retail footprint”: translation — close stores.
“We expect to recognize at least $1 billion of synergies as we aggressively reduce global expenses and optimize our retail footprint,” Ron Sargent, Staples’ chairman and CEO said in press statement.
“These savings will dramatically accelerate our strategic reinvention which is focused on driving growth in our delivery businesses and in categories beyond office supplies.”
Staples did not release any numbers on potential closing. It announced plans two years ago to close 225 stores by the end of 2015. It currently has about 315 Canadian stores.
Office Depot combined with OfficeMax in the U.S. last year, beginning a consolidation process in the office supplies sector. OfficeMax owned Grand & Toy, which is closing all its Canadian retail stores.
Last month activist hedge fund Starboard Value LP urged Staples to combine with Office Depot, based in Boca Raton, Florida. In a letter addressed to Sargent, Starboard suggested he immediately hire an investment bank and legal advisers to help the board evaluate, structure and execute a transaction with Office Depot.
Starboard disclosed in a regulatory filing in December that it had purchased a 5.1 per cent stake in Staples and boosted its stake in Office Depot. New York's Starboard has a history of buying stakes in companies and then pushing for change.
With files from the Canadian Press