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What: One day after surging due to merger rumors, shares of Staples (NASDAQ:SPLS) collapsed after the $6.3 billion acquisition of Office Depot (NASDAQ:ODP) was officially announced. Staples was down more than 10% two hours after the market opened on Wednesday.
So what: While industry consolidation was being viewed as a major positive for Staples before the deal was officially announced, the realities of a major acquisition are now sinking in. Staples expects the acquisition to deliver $1 billion in cost savings by the third year, but the company will need to take on quite a bit of debt in order to finance the deal.
Staples has secured a $3 billion credit facility and a $2.75 billion term loan in connection with the acquisition, and the interest on this debt will eat into any cost savings that the company is able to realize. Staples has also suspended its share buyback program in order to pay down this debt, although the company expects to continue paying its quarterly dividend.
Now what: The combined company will have an annual revenue of $39 billion, and it will be the only major office supply retailer left standing once the deal closes. Both Staples and Office Depot have been closing stores, and the combination will more than likely lead to even more store closings as the store base is further optimized.
However, there's no guarantee that the deal will ultimately be approved by regulators. In addition to retail, both companies operate commercial delivery businesses, and there's far less competition in that area. While Staples expects the deal to close by the end of 2015, any regulatory issues could cause delays.
Timothy Green has no position in any stocks mentioned. The Motley Fool owns shares of Staples. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.