Office Depot in $1.2 billion deal to buy rival OfficeMax

(Reuters) - Office Depot Inc will acquire smaller rival OfficeMax Inc in a $1.2 billion 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 location and CEO are all still undetermined, suggesting the companies were in a rush to get the deal confirmed after a draft accidentally went up on Office Depot's website.

Office Depot Chief Executive Officer Neil Austrian and OfficeMax CEO Ravi Saligram are both candidates for the top job, the companies said in a statement.

A source familiar with the situation said earlier on Wednesday that the deal was not yet completed when the statement was posted. News of the early release first broke around 7:30 a.m. EST (1230 GMT), but the confirmation did not come until about two hours later.

In a presentation to analysts, Austrian said the company's webcast provider inadvertently issued the press release "way ahead" of schedule Wednesday morning.

The error was reminiscent of Google's accidental earnings release last year, when a premature regulatory filing included a copy of the still-incomplete statement with the phrase "Pending Larry Quote" where CEO 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.

The agreement calls for the exchange of 2.69 Office Depot common shares for each OfficeMax share. At Tuesday's closing prices, the transaction would be valued at $1.17 billion, based on 86.7 million shares outstanding as of October 26.

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 plan to convert some of its preferred stock to common shares.

Office Depot and OfficeMax will have equal representation on the combined entity's board, however.

Office Depot shares fell 13.7 percent to $4.33 in midday trading, while OfficeMax was down 4.1 percent at $12.45. At those prices, OfficeMax was trading above the value of the bid.

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.

FALLING DEMAND

The two sides may have to address antitrust questions. Analysts say they expect less pushback from authorities for this deal than what Office Depot faced in the 1990s, when it tried to merge with Staples, given the changes in the office supply market since then.

OfficeMax's Saligram said the "marketplace had changed sufficiently" for the deal to pass muster.

But of seven antitrust experts polled by Reuters this week, six said they either expected a challenge by regulators or that 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.

"By combining our two businesses, we create a stronger, more efficient competitor able to meet the growing challenges of a rapidly changing industry," Austrian said.

Wall Street has clamored for this agreement, saying the office supply sector is ripe for consolidation. 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.

WEAK RESULTS

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. It also forecast slightly lower operating margins for this quarter.

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.

"It's a tough business," said B. Riley Caris analyst R. Scott Tilghman.

(Reporting by Phil Wahba; Additional reporting by Caroline Humer, Dhanya Skariachan and Olivia Oran in New York; Writing by Ben Berkowitz; Editing by Lisa Von Ahn)

Source: http://news.yahoo.com/office-depot-buy-officemax-1-2-billion-stock-131207297--finance.html

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