Now that the European Union has approved the merger of Staples (NASDAQ: SPLS) and Office Depot (NASDAQ:ODP), albeit with concessions, can it be long before U.S. regulatory opposition crumbles?
Earlier this year, the Federal Trade Commission filed an administrative complaint against the retailers seeking to block their $6.3 billion merger. The agency alleges the combination violates antitrust laws by restricting competition in the commercial contract market, where both Staples and Office Depot derive some 40% of their total sales.
But where Europe was willing to negotiate to mitigate the potential problems, the U.S. has stood fast against the deal.
According to the agreement Staples reached with the EU, so long as it divests Office Depot's contract business in Europe and all of Office Depot's operations in Sweden, Europe won't stand in the way of Staples acquiring its rival. Staples said it went even further and also agreed to divest Office Depot's retail, online, and catalog operations as well.
So far, the office supplies companies have won approval in Australia, New Zealand, China, and now Europe. Essentially, only the U.S. and Canada stand against their efforts to merge. The latter is doing so because its Competition Tribunal says the combined company will own more than 80% of all office product sales in Canada, which will likely cause higher prices, not just for consumers, but for large businesses and the government, entities that represent a half-billion in sales annually.
Yet Staples has said it is willing to do what's necessary to win regulatory approval for the deal, having gone so far as to say it would even divest as much as half of Office Depot's assets to allay antitrust concerns. So, with the rest of the world saying yes, will the U.S. really stand in the way?
Maybe. Although it could use this opportunity to wring extra concessions out of the two companies so they're not left looking like the odd man out, concessions made to European authorities would all but negate the value of the deal if it had to make them to satisfy U.S. regulators, too. Giving up the contract business here as well as abroad would essentially leave it with the ailing retail business. With Staples realizing about half of its operating profits from the segment, that's hardly an attractive option.
But there are differences between the U.S. and European markets that have led to a solution overseas, but haven't here at home.
In Europe, there is a third major office supplies retailer, Lyreco, that doesn't exist in North America. A couple of years ago, when Staples was trying to buy Corporate Express, it was Lyreco that became the linchpin in ratcheting up the final cost of the deal as Corporate Express tried to fend off Staples' advances by offering to buy Lyreco. Staples ultimately had to increase its bid to $2.65 billion to win over Corporate Express investors, but it was a price that subsequently plunged the retailer into a years-long period of financial underperformance.
Domestic customers could turn to the B2B office supplies marketplace of Amazon.com, but as much as the Internet retailer has eaten into Staples' and Office Depot's business, it still sold $107 billion worth of merchandise across all of its business lines, whereas the office supplies retailers sold around $40 billion worth of nothing but office supplies and services. Amazon or anyone else providing a competitive foil to the combined company remains relatively small in comparison.
All of this suggests there may be no way out for Staples and Office Depot. They've won the battle to get European approval, a victory that could help sway sentiment with U.S. regulators, but any negotiated settlement could put the price of victory well above what it would be worth to pay.