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Can Office Depot get antitrust approval?

Brent Nyitray, CFA, MBA

Can Staples and Office Depot get past the antitrust regulators? (Part 7 of 9)

(Continued from Part 6)

Regulatory approvals determine when the deal will close

It’s important to note that Staples (SPLS) and Office Depot (ODP) are guiding to an end-of-year close. They fully expect an in-depth antitrust review.

Antitrust

The companies will have to file under the Hart-Scott-Rodino Antitrust Improvements Act, or HSR. Typically, to get a handle on the antitrust, the first-step merger arbitrageurs will look at the 10-Ks of each company. Here, they go into depth describing their businesses and see if the two parties are named as competitors. We know already that they are named competitors. In fact, they are the only players in the office supply superstore space.

Eighteen years ago, this deal was blocked with OfficeMax as a third competitor. Now that OfficeMax is owned by Office Depot, there really are only two competitors. In antitrust parlance, this is a Coke–Pepsi merger. Mergers of number one and number two, when there are no other competitors, are usually nonstarters. Of course, other issues such as ease of access and barriers to entry also play a part in the regulatory decision.

Staples has stated it is willing to divest up to 10% of Office Depot’s revenue to get approval. That is all well and good, but the immediate question from the regulators will be, To whom are you going to sell these stores? The companies don’t have an answer, because there is no one to sell them to. Staples can offer to spin them into a new entity, but unless that new entity is seen as a true, robust competitor to the combined company, the regulators will probably not accept that offer. While there are foreign antitrust authorities to consider, the US will be the gating item.

SEC approval of the proxy

Given the antitrust reviews required, this is not going to drive the timing of the deal. Often, companies will have the vote during negotiations with the regulators and close immediately after a settlement.

Other merger arbitrage resources

For a primer on how to conduct risk arbitrage investing, read   Merger arbitrage must-knows: A key guide for investors.

Other important merger spreads include Hospira (HSP) and Pfizer (PFE). Investors who are interested in trading risk arbitrage through an ETF should look at the IQ Merger Arbitrage ETF (MNA).

Continue to Part 8

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