Feb. 18 (Bloomberg) -- Office Depot Inc. and OfficeMax Inc. are discussing a merger with a deal possible this week, said a person familiar with the matter.
The companies have been discussing a potential stock swap that would create a single office-supply retailer to compete with Staples Inc., said the person, who asked not to be identified because the talks are private. Office Depot, the second-largest office-supplies retailer in the U.S., has been exploring options since September, when activist fund Starboard Value LP became its largest shareholder.
A merger would create a company with almost $18 billion in revenue, compared with $25 billion in revenue last year for Staples. A deal also could be a victory for Starboard, which has been pushing Office Depot to create value for shareholders. The shares have declined about 90 percent from a peak in 2006.
Starboard Chief Executive Officer Jeffrey Smith wrote a letter to Office Depot CEO Neil Austrian on Sept. 17 arguing that the retailer’s “poor operating performance” has hurt the stock. Smith, whose firm owns 13 percent of the chain, recommended smaller stores carrying fewer items. It also should cut general expenses and lower advertising costs, he said.
While Starboard would support the idea of a merger, the firm would need to see terms of the deal before approving anything proposed between the two retailers, said a person familiar with the matter.
Julie Treon, a spokeswoman for Naperville, Illinois-based OfficeMax, wouldn’t confirm merger talks. “There have been rumors for a while about consolidation in the marketplace,” Treon said by phone. “It’s also been our policy not to comment on market rumors or speculation.”
Brian Levine, a spokesman for Boca Raton, Florida-based Office Depot, declined to comment in an e-mail. The Wall Street Journal earlier reported the talks on its website.
Any deal struck may be challenged by the Federal Trade Commission, said David Balto, an antitrust attorney in Washington who was the FTC’s director of policy for six years ending in 2001. He worked on the FTC’s lawsuit that stopped Staples from acquiring Office Depot in 1997.
Balto said reducing the number of big-box office retailers from three to two may be viewed as anti-competitive, just as it was back then. In addition, the Obama administration has been tough about enforcing antitrust laws, he said.
“They are facing a stiff wind,” Balto said in a phone interview. “You have three players right now and they want to reduce it by one. That rivalry results in better pricing and services for consumers.”
Office Depot closed at $4.59 on Feb. 15 in New York, down from a peak of $44.46 in May 2006. That gives the company a stock-market value of $1.31 billion, more than OfficeMax’s value of $932.5 million based on last week’s $10.75 closing price. OfficeMax closed as high as $54.54 in February 2007.
In response to pressure from Starboard, Office Depot adopted a so-called poison-pill provision on Oct. 30. The retailer passed a shareholder rights plan that would give its investors additional shares if one entity surpasses 15 percent ownership, it said in a statement at the time. Starboard owned 14.8 percent of the retailer as of Oct. 12.
The provision is designed to protect all stockholders “against potential acquirers who may seek to take advantage of the company and its stockholders through coercive and unfair tactics aimed at gaining control of the company without paying all stockholders a full and fair price,” according to the statement.
Office Depot also hired Morgan Stanley as an adviser to defend against Starboard’s actions, the person said.
There has been speculation of a merger between the two smaller office retailers since last year. A combination of Office Depot and OfficeMax would be “natural,” Staples Chairman and CEO Ronald Sargent said last year at a conference. The FTC is more likely to allow such a combination than if Framingham, Massachusetts-based Staples were to buy either company, he said.
Separately, Office Depot is in talks to sell the remaining 50 percent of its Mexican unit to Grupo Gigante SAB, people familiar with the situation said Feb. 15.
Grupo Gigante, which already owns the other half of Office Depot de Mexico, is in discussions with local banks to help finance the deal, said the people, who asked not to be identified because the talks are private. The sides are considering other options and the talks may still fall apart, said one person.