The Staples (SPLS)-Office Depot (ODP) merger saga may be coming to an end.
On Tuesday, a judge overseeing a hearing between Staples-Office Depot and the Federal Trade Commission (FTC) came to an end with no decision. The flimsy result -- which was basically a judge telling both parties to figure things out on their own -- wasn't what I expected. I thought the judge would obviously rule one way or another, leaning toward signing off on a transaction that makes an absurd amount of sense.
Nonetheless, for the first time in a while I feel a bit more confident in the deal getting passed, seeing as nothing was solved through the entire ordeal. Throughout the process, we learned several things:
- Staples' resolve in getting a deal done.
- The government has not met its burden for proof that such a combination would harm prices for consumers.
- Such a deal looks great post the Treasury Department's new rules on inversions, which has caused Dividend Stock Advisor portfolio holding Pfizer (PFE) to step away from its ambitious bid for Action Alerts PLUS charity portfolio name Allergan (AGN).
Do I think a proposed Staples-Office Depot tie-up will keep a combined company from vanishing by the year 2030? Not exactly. The business model of selling low-margin office supplies inside of huge, high-rent warehouses in suburbia is dying, thanks to online shopping. Seeing Staples beginning to rent out space inside of its stores to small businesses underscores that point.
Further, I view Staples' alleged proposition of holding prices unchanged for three years after completing a deal for Office Depot as particular worrying from a shareholder perspective. It means that any product inflation will hurt the company, and it will live in a state of merchandise margin pressure, thanks to Growth Seeker portfolio name Amazon.com (AMZN)'s willingness to just about give products away online. That places heightened pressure on Staples execs to quickly close stores, slash jobs, and consolidate the supply chain to deliver cost savings that boost core earnings.
Having said that, the 15-year outlook for a behemoth office supplies retailer doesn't matter at the moment. All that does matter is perception, if one is inclined to trade this soon-to-end saga. And the perception right now is that the two retailers have inched closer to a deal that will unlock serious cost synergies (likely above $1 billion).
With Office Depot shares still trading well below their 52-week high, that may be the way to play the perception card here. Also working in favor in terms of perception is that both businesses have somewhat held up during this entire public mess. There has been some disruption in the office supplies businesses that the two companies operate, but sales to retail stores aren't falling by double-digit percentages due to major supply disruption, and plans already in place to close tons of stores have continued unabated.
Staples' bid for Office Depot was $6.3 billion. Today, its market cap is $4.15 billion.
The bid is likely to be revised down a bit, due to the impact to delivery business and the need to close more stores.
Still, Office Depot is likely worth more to Staples than $4.15 billion.