Stressed Out: FTC Sets Benchmark for Staples-Office Depot Merger Approval

 | Mar 17, 2016 | 12:06 PM EDT
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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.

As the May 10 Office Depot (ODP)/Staples (SPLS) Federal Trade Commission anti-trust trial looms, the maneuvering among interested parties has intensified.

The two companies met with FTC officials on March 8 and 9, it was revealed at a pre-trial conference Wednesday, to discuss a path forward for their pending $6.3 billion merger.

Staples' attorney Diane Sullivan told U.S. District Court Judge Emmet Sullivan that the settlement proposal talks bore no fruit. FTC lawyer Tara Reinhart responded to that assertion by saying that the only settlement the agency will consider is the two companies "divesting a going concern," according to court transcripts of the proceeding obtained by the Florida Sun-Sentinel.

In other words, the store closings and divestitures the companies have made up until this point have not been sufficient to quell the FTC's concerns about the lack of competition a merger between the top-two office supply retailers in the country would create. The FTC wants the companies to spin off a business large enough to stand on its own.

The FTC has maintained that it does not see online retailer Amazon (AMZN) -- a Growth Seeker holding -- as a rival to the companies, due mainly to the fact that the corporate contract market is dominated by Office Depot and Staples.

Last month, the companies attempted to address that issue when they announced that they would sell corporate contracts totaling $550 million to wholesaler Essendant (ESND).

Office Depot agreed to sell its contract distribution business in the European Union and Switzerland while also selling its entire business in Sweden.

Selling these assets was enough for the merger to gain regulatory approval in Europe last month.

"The substantial remedies package offered will ensure that effective competition is maintained, in particular on the EU's international office supplies market. This will allow European companies to continue to benefit from the Single Market by procuring their office supplies internationally and to reduce costs," said European Commission Commissioner Margrethe Vestager.

The merger has been approved in the EU, Australia, New Zealand and China, but the U.S. remains the biggest obstacle to a marriage of the two.

Further complicating the tie-up are reports from the New York Post today suggesting that Amazon is considering a bid for Office Depot's corporate business unit as part of its effort to launch its own office supplies business.

The Post cites a source close to an activist investor who took a stake in Office Depot on the belief that Amazon would soon step in with an offer. Amazon purchasing Office Depot's corporate business unit would seemingly clear the way for its merger with Staples to proceed, according to the report.

All of these moves will come to a head when the antitrust trial begins, but in the meantime, it behooves Staples and Office Depot to do as much as they can to appease the FTC. 

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