Proposed Staples-Office Depot Merger Prompts FTC Scrutiny Into Competition Among Corporate Suppliers

In February, Staples, Inc. (NASDAQ: SPLS) and Office Depot, Inc. (NYSE: ODP) proposed a merger than would see the companies combine in a deal that then valued Office Depot for $6.3 billion. Shares of both Staples and Office Depot initially soared on the news, only to face a continued slow slide over the following months.

The Columbus Dispatch, citing unnamed sources, has reported that antitrust officials with the Federal Trade Commission are closely examining the impact a combined Staples-Office Depot entity on corporate clients. The FTC is reportedly less concerned about individual Staples and Office Depot customers, where there appears to be sufficient competition to ensure a fair playing field.

Chatter about possible moves by the FTC to block the deal has increased, accompanying the slide in both Staples and Office Depot shares.

Though often referred to as a merger, the proposed deal would technically involve Staples purchasing Home Depot at a premium. In deals of this sort, especially when anti-competition concerns are not a factor, shares of the target company (Office Depot in this case) trade up to just below the buyout price and then trade slowly up as the record date approaches, much as if the market were valuing the shares as a Treasury Bill, with an additional risk premium.

Initially, Office Depot shares behaved in this fashion, but as months wore on and antitrust talk picked up, stock in the office supply company began to slide.

The deal to purchase Office Depot involves an offer to buy shares for $7.25 plus 0.2188 of a Staples share. The value of the 0.2188 Staples share component fluctuates with the price of Staples stock, so some change in the market price of Office Depot shares was to be expected. Recent volatility in equity markets has not helped the shares of either company.

Currently, the Staples offer values Office Depot shares at $10.16. Office Depot shares are currently trading at $7.62. In an environment where T-Bills yielded 20 percent, this market value might be seen as reasonable. However, current T-Bill yields are at historic lows, hovering just above zero. Office Depot shares are currently trading at a 25 percent discount to the $10.16 the deal values them at. The only explanation for this wide spread is that market participants are fearful of a move by the FTC to block Staples and Office Depot from combining.

The deal currently values Office Depot near $5.57 billion, or approximately 11 percent below the $6.3 billion announced in February.

Staples and Office Depot both reported inline second quarter 2015 earnings. Despite the performance of Office Depot and Staples stock, the Wall Street Journal is reporting that executives have stated the deal is on schedule and should be completed before the end of the year.

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