Office Depot will buy Office Max in stock deal

The two office supply companies will come together to challenge industry leader Staples, Inc.

Office Depot Inc. said Wednesday it agreed to buy OfficeMax in an all-stock deal that would transform office supply retail sector.

Boca Raton, Fla.-based Office Depot Inc. and Naperville, Ill.-based OfficeMax said holders of OfficeMax shares will receive 2.69 shares of Office Depot for every OfficeMax share they own.

That's equal to about $13.50 per share, based on Office Depot's $5.02 per share closing price Tuesday, giving the deal a total value of about $1.2 billion. OfficeMax had about 86.7 million shares outstanding as of Oct. 26, according to SEC filings.

Office Depot posted the news in its earnings release on its Web site on Wednesday morning, but the release later seemed to be taken down from the site. Office Depot and OfficeMax did not respond to requests for an explanation.

The move would combine the No. 2 and No. 3 office supply retailer and lead to consolidation in an industry that analysts have said for years is overstored. It reflects the changing retail landscape as "big box" stores become outmoded and more people shop online.

Office Depot and OfficeMax, along with bigger rival Staples Inc., were all founded in the mid- to late 1980s and helped pioneer the big-box boom in the 1990s, expanding rapidly in the U.S.

But the rise of Web retailers like Amazon.com and more expansion into office supply categories by discounters like Costco and Wal-Mart has been tough on the sector. In addition, office suppliers were slow to bounce back from the recession, as consumers and small businesses alike cut back on ordering office products.

The companies have closed stores, slashed costs and streamlined operations to offset stagnant sales. Rumors about possible consolidation have swirled around the sector for years but nothing ever materialized.

The Wall Street Journal reported the possibility of the deal on Monday, sending stock across the sector soaring on Tuesday.

Analysts say that if the deal closes it would likely benefit the largest office supply player Staples Inc. since the combined entity will likely close stores.

"We think a potential merger would result in a significant number of store closings, and thus an improvement in the overall economics of the office supply retail business," said S&P analyst Ian Gordon on Tuesday. "This area has been under pressure from a weak business spending environment and competition from non-traditional channels like Amazon in our view."

The office supply sector is worth about $21.2 billion, according to research firm IBISWorld Inc. in Santa Monica, Calif. Of that, Staples holds a 35 percent market share, Office Depot 26.1 and Office Max 15.6.

Staples is much larger than its smaller rivals, with 2,295 stores worldwide and a market capitalization of $9.56 billion. In contrast Office Depot's market capitalization is $1.43 billion and OfficeMax is $1.13 billion. Market capitalization is the market value of a company's outstanding shares and can be used to measure a company's size.

The deal still has to go through shareholder and regulatory approvals, and office supply mergers have been questioned by regulators in the past. In 1997, Staples Inc. attempted to buy Office Depot but the deal was nixed by the Federal Trade Commission due to concerns the combined company would have too much of a competitive advantage in the marketplace.

Office Depot shares rose 46 cents, or 0.2 percent, to $5.48 in morning trading. OfficeMax shares rose $1.43, or 11 percent, to $14.43 in pre-market trading and Staples shares rose 15 cents to $14.80.