Jefferies And Citi Bullish On Staples Growth During Sector Consolidation
Office suppliers shares up on merger talk
February 19, 2013 8:43 AM ET
NEW YORK (AP) - Shares of office suppliers jumped in premarket trading Tuesday after a report in The Wall Street Journal said OfficeMax and Office Depot are considering combining.
The report on Monday cited unidentified people familiar with the matter and said an announcement may come as early as this week. OfficeMax and Office Depot declined to comment on Monday.
But investors hopeful that a deal could be worked out drove up the companies' shares. OfficeMax Inc. stock rose $2.15, or 20 percent, to $12.90 in premarket trading. Office Depot Inc. shares rose $1.33, or 29 percent, to $5.92. Stock of Staples Inc., the largest U.S. office supplies chain, also got a lift, up $1.85, or 14 percent, to $14.80.
The office supply business is very competitive. Staples has traditionally been stronger than its rivals, and new entrants in the market in recent years have made it even more difficult. Online retailer Amazon and big discount stores such as Costco and Wal-Mart have expanded office supply offerings.
On Tuesday, analysts considered what consolidating office product companies would mean to the industry. Several pointed out that Staples tried to buy Office Depot in 1997, but was blocked by the Federal Trade Commission.
"We think there is a fair amount of risk that the FTC would not look favorably on a potential merger of the number 2 and number 3 players in the office product space," said Citi Investment Research analyst Kate McShane.
But since more companies provide office products now than they did then, OfficeMax and Office Depot might stand a better chance of having their combination approved by regulators, said Jefferies analyst Daniel Binder.
If the deal went through, Office Depot and OfficeMax could save a lot of money — about $480 to $580 million over three years, according to calculations by Binder. But that wouldn't necessarily translate straight to profit since the industry is likely to shrink, and Amazon, Wal-Mart and others remain "aggressive" competitors.
Both Binder and McShane said that a combination of Office Depot and OfficeMax would benefit Staples, as the merged company shut down competing stores. That would create growth opportunities for Staples. .