Stressed Out: Office Depot, Staples Aren't Taking FTC Opposition Laying Down

 | Feb 17, 2016 | 3:30 PM EST
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This article is part of a Real Money series on 20 companies investors should consider adding to their distressed watch list.

Office Depot (ODP) and Staples (SPLS) aren't giving up on this merger without a fight.

A week after the companies' $6.3 billion merger was approved by European regulators, Staples announced that it sold some of its wholesale contracts to workplace essentials distributor Essendant (ESND) for about $22.5 million. The contracts, which cater to resellers owned by women and minorities, represents sales of about $550 million for Staples annually. The sale is subject to the Federal Trade Commission's approval of Staple's proposed merger with Office Depot.

However, while the companies' merger has already received approval in Australia, New Zealand, China and Europe -- the merger still faces an enormous regulatory hurdle in the U.S. and Canada.

The Federal Trade Commission sued to stop the companies' merger in December. "The Commission has reason to believe that the proposed merger between Staples and Office Depot is likely to eliminate beneficial competition that large companies rely on to reduce the costs of office supplies," said FTC Chairwoman Edith Ramirez.

Regulators said that since the two companies are most often the top two bidders for contracts from large businesses, a tie-up would leave too large a hole in the competitive landscape.

Staples officials responded to the lawsuit by saying that the FTC's complaints were "fundamentally flawed." The company said that the lawsuit was a "misguided application of the antitrust laws," because the companies face "fierce competition today and in the future from a strong and expanding set of competitors."

"The acquisition has been approved in Australia, New Zealand, China and Europe. Regulatory agencies around the world understand that this acquisition will allow Staples to provide increased value and service to customers of all sizes. We look forward to a full, impartial judicial review in the United States," said Staples CEO Ron Sargent in a release.

Outsiders view the moves the two companies are making as part of the plan to sway the judges opinion in their favor ahead of the judicial review. 

"Based on the litigation posture and the hearing just a few weeks away, Staples must be of the view that this divestiture will move the needle towards the judge blessing the transaction," Andrea Murino, co-chair of Goodwin Procter's antitrust practice told Real Money's Brian Sozzi today. "Otherwise, they would have had no reason to take the time, effort, energy to get it signed." 

Office Depot's stock could really use a shot in the arm. Over the past 20 years, the shares have lost more than 90% of their value. The stock went from over $35 per share as recently as 2007, to about $5 per share currently. Over the past four years, Office Depot has more than doubled its debt levels to about $1.6 billion from $659 million in 2012.

Staples has added incentive to close this deal. On top of the financial necessity of combining the two companies in a dwindling office supplies market, Staples faces a $250 million charge it has to pay Office Depot if the merger is not approved.

According to research firm Euromonitor, the U.S. market for office supplies sold in stores has been in a protracted decline since 2007, and totaled $11.7 billion in 2014. Staples' market share fell to 38.2% in 2014 from 40.6% in 2013, estimates Euromonitor.

Staples has previously said that a tie-up would net the combined companies more than $1 billion annually by the third year.

The court hearing is scheduled to take place in March in a U.S. district court. One way the other, Office Depot and Staple's merger story will come to a conclusion in the coming months.  

For more on Real Money's 20 distressed companies to watch:

Stressed Out: Introducing Real Money's Distressed Index

Stressed Out: Office Depot/Staples Merger Sees Ray of Hope Following EU Approval

Stressed Out: Sprint Is Collapsing Under the Weight of Its High-Yield Debt

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