Desperate to salvage its apparently sinking acquisition, Staples (NASDAQ:SPLS) is reportedly willing to shed even more assets to gain regulator approval.
As part of its $6 billion buyout of rival Office Depot (NASDAQ:ODP), the office supplies leader had originally agreed to divest as much as half of Office Depot's assets to allay any antitrust concerns at the Justice Department. By subsuming Office Depot, Staples will be the last remaining national brick-and-mortar office supply retailer left in the market, and while the number of stores operated by one company is a concern, it may be the commercial contract market, where Staples and Office Depot derive around 40% of their total sales, that could be the biggest worry.
That's because although there might be just one national office supplies retailer after the merger, customers still have a lot of choice in the marketplace where they can buy reams of paper, pens, and paper clips. It was the growth of competitors like Wal-Mart, Target, and even Amazon.com that helped to depress the specialized office supplies retailers and made consolidation in the industry necessary.
Yet it was also why the FTC allowed Office Depot to acquire Office Max in 2013, when it had previously denied Staples' attempted acquisition of Office Depot six years earlier. The competitive landscape has changed appreciably over time for office supplies stores, but there aren't the same opportunities for shopping around in the commercial contract market.
The Wall Street Journal recently said that in negotiations with trade regulators, Staples was willing to transfer to Essendant (NASDAQ:ESND) (previously known as United Stationers until last month) up to $600 million worth of commercial contracts, but apparently, that still isn't enough to sway them.
It has been rumored for a while that the merger is standing on shaky legs, with the New York Post having said that in September, a Post-It note allegedly attached to the merger's file was marked "No deal". And just the other day, the newspaper reported the FTC was "ramping up for litigation", meaning it was preparing to quash the deal, which is why Staples may be forced to shed even more businesses from the combined entity.
Essendant itself hasn't said whether it stands to gain from the merger, reportedly noting during the company's third quarter earnings conference call with analysts that it "would be open to acquisitions", but as the deal deadline approaches, chatter is growing that the sale of commercial contracts business will happen.
The FTC has several routes it can take. It can approve the deal as-is (though that seems increasingly unlikely), it could push for modifications to the deal, or it could sue to stop the deal. That last option seems to be the way the regulators are leaning, and Staples could face just as difficult a task getting European regulators on board as it is having here in the U.S.
While investors were heartened by the reports that Staples was willing to divest more assets, pushing its stock 3% higher on Friday, they should perhaps be more worried about the deal. Staples has a poor record of incorporating big mergers, as its purchase of Corporate Express a few years back proves, and there is still the ticking time bomb of liability surrounding the data breach that occurred at its tiny PNI Digital Media subsidiary in July that affected the photo processing websites of Wal-Mart, Costco, CVS Health, and more. Wal-Mart's Canadian site is apparently still down.
While regulators have a poor record of picking winners and losers in the marketplace, if they ultimately do decide to quash the Office Depot acquisition, it could end up being the right decision made for the wrong reasons.
Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com and Costco Wholesale. The Motley Fool recommends CVS Health. 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.