OFFICE DEPOT & OFFICEMAX MERGER ?
Depot and ‘Max discussing
tie-up?
Reliable industry sources have
indicated to OPI that top level meetings have been taking place between
Office Depot and OfficeMax. Could the two companies be looking at a
tie-up?Rumours of a merger between Depot and ‘Max are nothing new. It
has generally been accepted for some time that some form of
consolidation between the big box players is required, notably in the
retail channel where the presence of three office supply chains is
regarded as at least one too many. And anyway, paraphrasing the
legendary Jack Welch, who wants to be number three in a category?Many
observers were predicting early last year that either Depot or ‘Max (or
possibly even both) would be forced to file for bankruptcy protection
before the year was out. That didn’t happen, and both companies have
emerged from the economic wreckage that was 2009 in a relatively healthy
financial state and with stronger balance sheets and liquidity
levels.However, that doesn’t change the long-term picture in terms of
overcrowding in the office supplies retail space as shoppers make fewer
trips and retailers such as Wal-Mart and Target continue to take more
market share of office supplies.
‘Max has taken the route of
trying to re-invent itself as a more upmarket destination with its
classy new store look, smaller format stores and its focus on more
stylish products aimed at female customers. This could be considered
something of a gamble if, as the market research firms keep telling us,
we are entering an era of consumer thrift.’Max’s challenge will be to
keep customers coming through its doors despite potentially higher
prices. In its favour, ‘Max has a sizeable number of leases up for
renewal and should be able to use the current state of the commercial
real estate market to cherry pick locations that best suit its retail
strategy (it could also decide to close stores as leases expire without
incurring penalties).
Depot has also been reducing store size
with its M2 formats and revamping its product assortments, carrying out
extensive line reviews, in an effort to differentiate itself.In terms of
store count, there is not much to choose between the two: at the end of
2009, Depot had around 1,150 North American stores, while ‘Max had
about 1,000. Retail, of course, is only one side of the coin.’Max’s
contract business is actually slightly bigger than its retail at $3.7
billion (although it does include its Canadian Grand & Toy and
Australasian operations in its contract results). This puts it on a par
with Office Depot, whose North American Delivery division posted sales
of $3.5 billion in 2009.Both companies have had issues with their
contract divisions over the last couple of years and in 2009 each saw
sales decline by around 15 percent compared to the previous year.
The
key issue is that Staples continues to distance itself from its two
nearest challengers.The Framingham-based giant went into the recession
ahead of its rivals and has come out of the other side with the gap even
bigger.Staples’ total North American store count (1,870) is not that
far behind the combined Depot and ‘Max total, while North American
contract sales – at $9.6 billion – are some 25 percent more than the
other two put together.Staples recent results have been considerably
better than either Depot’s or ‘Max’s – suggesting that Staples is
winning market share – and the North American integration of Corporate
Express has gone to plan.Staples has also recently agreed to buy the
minority shareholding of Corporate Express in Australia for an estimated
$400 million, demonstrating that, even with the debt burden it took on
after the Corporate Express takeover in 2008, it has the resources to
make further major acquisitions.
About half of the $300 million
in annual synergies that Staples identified from the Corporate Express
acquisition was due to its increased purchasing power and being able to
renegotiate better contract terms with vendors.A full-blown Depot/’Max
merger still looks like a difficult scenario to imagine. Whereas Staples
and Corporate Express more or less complemented each other, a marriage
between Depot and ‘Max – two similar businesses – is more likely to face
tougher and more complicated integration issues that could seriously
weaken the resulting entity. Furthermore, after all the recent problems,
do they want to face the prospect of another period of upheaval with a
merger? Probably not.Of course, they could be forced into such a
situation if a third party, such as a private equity firm, came in and
bid for both companies. BC Partners has around a 20 percent stake in
Office Depot that it bought for a bargain $350 million. It is a company
that is used to making multi-billion dollar deals and may view this as
an opportune time to make another move in what it shaping up to be a
record investment year for the firm.
It has been suggested that
such a move would be blocked by US anti-trust authorities. That’s not
certain, however. At a recent investor presentation, OfficeMax CEO Sam
Duncan, was at pains to point out that the power channel in the US only
accounted for 10 percent of the total market share for office and school
supplies. Could this have been with one eye on an imminent announcement
on some form of industry consolidation?In addition, Steve
Odland – who has consistently refused to speculate on industry
consolidation in the past – told the Florida press after Office Depot’s
recent annual shareholder meeting that he viewed the office supplies
market as being “highly fragmented”, which could be taken as a hint that
consolidation is on his agenda