Amazon.com (NASDAQ:AMZN) is rumored to be interested in buying Office Depot's (NASDAQ:ODP) corporate accounts business. As that was the crown jewel of what rival Staples (NASDAQ:SPLS) was looking to gain control of when it sought to buy the office supplies retailer, if Amazon ever got hold of it, you might as well stick a fork in Staples.
A year ago Staples and Office Depot agreed to a $6.3 billion buyout. Following the Great Recession and Office Depot's own acquisition of Office Max, the marketplace was littered with more retail locations than it could handle, and while both outlets announced plans to close hundreds of stores, it was clear both were too weak to effectively remain competitive without further consolidation.
Over the years not only had the office supplies retailers engaged in cutthroat competition with one another, but others entered into the market as well. From Wal-Mart and Target in the bricks and mortar space, to Amazon.com online, the landscape had changed dramatically.
Yet in a bid to smooth over anticipated regulatory queasiness at leaving just one publicly traded office supplies company standing, Staples was pretty much willing to divest as much as half of Office Depot's assets.
But the Department of Justice decided it wasn't the retail operations that were the problem, but rather the corporate contract market where both Staples and Office Depot derive around 40% of their annual revenues. By reducing the market to just one major player, the risk to business (and the government) of having to pay higher prices was too great and the antitrust regulators filed suit against the merger in an attempt to block it.
Staples, though, had agreed to divest some $600 million worth of the contract business to Essandant (NASDAQ:ESND), but the regulators apparently thought it wasn't enough. The FTC argues the two retailers sell 79% of the office supplies to Fortune 100 companies in the U.S who are worried the deal will lead to higher prices for them. In a sharply worded response, however, both Staples and Office Depot said that was based upon "flawed analysis" and "cherry picked facts."
They also point out the FTC's own analysis showed 99% of their customers would be unaffected by the deal and the agency was simply "concerned with protecting the 100 largest companies" in the U.S. It also failed to take into account the rise of competitors like Amazon and the disruption it's caused in the digital marketplace. As a result, they are seeking "15 heavily redacted documents" from Amazon about its business marketplace to prove the online retailer is far more of a competitive threat in the contract accounts business than the government is giving it credit for.
That is why if Amazon ends up buying Office Depot's contract operations, it could spell the end for Staples.
According to a recent article in The New York Post, an activist investor has taken a stake in Office Depot believing that if the online marketplace got the business, it would clear the way for Staples to make the acquisition. Earlier this month, Starboard Value, the activist investor that prodded the office supplies retailers to make the merger move, dumped its shares in Office Depot, leaving only some options to buy the stock.
But with the weakness in the retail market, Office Depot's real estate is not the deal Staples wants to make and if it was left with only the bricks and mortar footprint of its rival, would it even want to go through with it?
Office Depot reported revenues in 2015 tumbled 9% from the year ago period because of store closures while comparable sales at those that remained open were flat. Staples revenues were down 7% with comps down 3% for the year, 4% in the fourth quarter. More importantly, operating margins dropped three basis points to 4.5% in the North American retail division, but rose 27 basis points to 7.2% in the North American commercial market.
An Amazon acquisition would certainly gut the rationale for Staples own bid, but would probably also ruin its chance of a profitable recovery and could also spell its demise.
Rich Duprey has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Amazon.com. 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.