Office Depot Inc will acquire smaller rival OfficeMax Inc in a $976 million all-stock deal, the companies said on Wednesday, confirming an agreement inadvertently announced earlier in the day, before it was completed.
The combined entity's name, headquarters and CEO are all undetermined, an unusual level of major decisions yet to be made that points to the integration challenge the companies face.
"I have seldom seen a situation where they can't decide on the name, the CEO or the corporate headquarters. Normally that's what you work out before you announce a deal," said Tom Stemberg, managing general partner of the Highland Consumer Fund and founder of office supply chain Staples.
Office Depot shares plunged 17 percent, dragging down the value of the deal. Even with a parallel 7 percent decline in OfficeMax's shares, that stock still closed well above the per-share value implied by the offer.
A source familiar with the situation said the terms of the deal were not yet finalized when the news first broke around 7:30 a.m. EST (1230 GMT) on Office Depot's website in an earnings release that contained certain merger details. Confirmation only came about two hours later.
In a presentation to analysts, Office Depot Chief Executive Officer Neil Austrian said the company's webcast provider inadvertently issued the press release "way ahead" of schedule. Thomson Reuters acknowledged that one of its units was responsible for the premature release.
"We regret this error and are taking all steps necessary to enhance our processes and controls to ensure this does not happen again, as serving our valued customers remains our highest priority," Thomson Reuters said in a statement.
Thomson Reuters is selling its investor relations and services businesses, the unit that was responsible for issuing the Office Depot release, to Nasdaq OMX Group Inc for $390 million. The deal is expected to close during the first half of this year.
The error was reminiscent of Google's accidental earnings release last year, when a premature regulatory filing by its printing services provider RR Donnelley & Sons included a copy of the still-incomplete statement with the phrase "Pending Larry Quote" where Chief Executive Larry Page's comment was supposed to go.
OFFICEMAX TRADES ABOVE BID
Office Depot insisted the deal was a merger of equals and not an acquisition, although its shareholders would get the larger part of the combined company. Austrian and OfficeMax CEO Ravi Saligram are both candidates for the top job, though Austrian said it was premature to discuss who the CEO would be before the deal wins regulatory approval.
The agreement calls for the exchange of 2.69 Office Depot common shares for each OfficeMax share. At Wednesday's closing prices, the transaction would be valued at $975.9 million, based on 86.8 million shares outstanding as of December 29.
Office Depot executives said their shareholders would own 51 percent of the combined entity, and OfficeMax shareholders would own 44 percent. Office Depot preferred shareholder BC Partners would own 5 percent, assuming it follows through on a potential plan to convert some of its preferred stock to common shares.
If BC Partners' stake were fully redeemed, Office Depot shareholders would own 54 percent and OfficeMax 46 percent. Office Depot and OfficeMax will have equal representation on the combined entity's board, however.
Office Depot shares closed down 16.7 percent at $4.18, while OfficeMax fell 7 percent to $12.09. Both had been down much more sharply before rebounding somewhat in the last hour of trading.
It was not immediately clear whether the offer was enough to satisfy one of OfficeMax's largest shareholders, Neuberger Berman, which said earlier this week that it would support a deal depending on the terms.
One of the firm's key demands was that OfficeMax pay out a special dividend to shareholders. Under the terms announced Wednesday, OfficeMax would be able to pay cash dividends of up to $1.50 per share before the deal closed.
J.P. Morgan was financial adviser to OfficeMax, and Skadden, Arps, Slate, Meagher & Flom LLP and Dechert LLP were legal advisers. Peter J. Solomon Co and Morgan Stanley were financial advisers to Office Depot's board. Simpson Thacher & Bartlett LLP was legal adviser to Office Depot, and Kirkland & Ellis was legal adviser to its board. Perella Weinberg Partners also acted as financial advisers to the transaction committee of Office Depot's board.
The two sides may have to address antitrust questions, though Austrian said it was "very unlikely" the deal would be blocked. Analysts expect less pushback from authorities for this deal than what Office Depot faced in the 1990s, when it tried to merge with Staples. Of seven antitrust experts polled by Reuters, six said they expected a challenge by regulators or said it was still too close to call.
Office supply retailers, often seen as a barometer of economic health, have suffered as demand for their products fell after the recent U.S. recession. They also face strong competition from Amazon.com Inc and Wal-Mart Stores Inc in selling everything from pens and notebooks to furniture to government, businesses and individuals.
Office Depot and OfficeMax said combining would help them compete better with online retailers and warehouse clubs, among others. They expect the deal to yield annual cost savings of $400 million to $600 million within three years after its anticipated closing by the end of 2013.
They declined to discuss any potential store closings on a conference call with analysts, which Wall Street expects to be a key outcome of the deal. Some analysts expect store closings to be required for antitrust approval.
BB&T Capital Markets analyst Anthony Chukumba said the Office Depot-OfficeMax combination would help larger rival Staples, too.
"Clearly, you can't make this deal work unless you close a bunch of stores," he said. "Store rationalization is long overdue, and Staples will clearly benefit from just having fewer stores to compete with."
Staples has 39.9 percent of the U.S. office supply market, Office Depot 19.2 percent and OfficeMax holds 15.7 percent, according to Euromonitor International.
Both companies also reported fourth-quarter results Wednesday, figures that helped make analysts' point about the need for consolidation in the sector.
OfficeMax said sales fell 7 percent in the quarter and would decline in the first quarter as well. Excluding special items, the company broke even in the fourth quarter, while analysts were expecting a profit of 4 cents per share, according to Thomson Reuters I/B/E/S.
Office Depot reported a 12 percent decline in sales, which missed Wall Street expectations. Earnings of 16 cents a share before special items beat the analysts' forecast by 1 cent.