This article is part of a Real Money series on 20 companies investors should consider adding to their distressed watch list.
A ray of hope, even if it is false, could help a stressed-out stock in the short run, but unless there is a major shift in the thinking of U.S. regulators, Office Depot's (ODP) proposed merger with Staples (SPLS) still appears to be in trouble.
Both Staples and Office Depot are climbing in early market trading on Wednesday after European regulators approved the two companies' proposed $6.3 billion merger after they agreed to sell some of Office Depot's assets in the country.
Office Depot agreed to sell its contract distribution business in the European Union and Switzerland while also selling its entire business in Sweden.
"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 commission's investigation into the merger revealed that there were only three companies in the European Union -- Office Depot, Staples and Lyreco -- that were capable of entering into international supply contracts for large business customers. The commission, which said that it is cooperating closely with U.S. and Canadian anti-trust officials, also said that it did not currently consider online retail companies like Amazon (AMZN) to be competitors in the contract business market in Europe because they only sell office products through the online sales channel.
"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 Chairman and CEO Ron Sargent.
On Dec. 7, both the U.S. Federal Trade Commission and the Canadian Competition Bureau sued to challenge the merger of the two companies, citing anti-trust concerns. U.S. regulators rejected Staples' proposition to offload $1.25 billion in contracts.
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.
While the company matched analysts' earnings expectations of $0.16 per share in the previous quarter, Wall Street expects EPS to decline 31%, to $0.11, in the current period.
Meanwhile, Staples shares have declined more than 40% in the past year.
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.
The bottom line is Office Depot needs this merger to go through. While the EU does not see Amazon as a competitor to the company -- that fact alone may sway U.S. regulators even further away from a merger -- Amazon is eating away at its retail business. Office Depot may not be able to survive the current market on its own, so today's EU ruling does offer a ray of hope. But that ray will be diminished if U.S. regulators hold fast to their view.
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