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NEW YORK (AP) — Evolving shopping habits have forced yet another retailer to think outside of the box.
Staples, the nation's largest "big box" office supply chain, announced Wednesday that it's spending about $6 billion to buy its second-ranked rival, Office Depot.
The acquisition reflects a reversal of fortunes for big-box retailers. Founded in the late 1980s, Staples and Office Depot were among a group of chains led by Wal-Mart that opened thousands of supersized stores during much of the next two decades for shoppers who wanted to buy in bulk.
But shopping patterns changed in recent years as Americans have grown increasingly deal-hungry and comfortable with online shopping. Competition from smaller stores and the rise of online retailers like Amazon.com also have hurt big-box chains.
Office supply retailers also have some unique issues, though. The impact of technology on the U.S. workforce has dramatically shrunk the demand for items that were once their bread-and butter, including personal computers, ink cartridges, and printers.
In the 1990s, office supply retailers catered to the throngs of workers setting up home offices. But, now with the popularity of smartphones, people can work anywhere. They also are buying fewer PCs and other big gadgets in favor of small devices like smartphones.
Staples has been ahead of its office supplies peers in responding to the changes. It's been changing its mix of products in the stores, beefing up services like copying and offering more items online. It's also been opening smaller stores and investing in services aimed at specific small businesses.
But the brick-and-mortar office supply chain business has continued to struggle as online sales have grown. Last year, office products sold online hit $9.2 billion, accounting for 24 percent of the overall office supplies category. That's up from $2.6 billion, or 7 percent of the market, in 2004, according to Forrester Research.
Meanwhile, Office Depot's sales have been mostly on a downward slope since its fiscal 2007 year when they peaked at $15.5 billion, according to research firm FactSet. Sales rose in the latest year because of its deal with OfficeMax. Staples' sales peaked in fiscal 2011 at $25 billion, and have been down since.
Hedge fund Starboard Value LP, which disclosed a 5.1 percent stake in Staples in December, last month publicly urged the company to make a move on Office Depot. Staples and Office Depot tried to combine forces before but were blocked by antitrust regulators.
That was almost 20 years ago, however, and with the boards of both companies signing on unanimously to try it again, they appear confident that the landscape has changed substantially.
The deal, which comes a little more than a year after Office Depot acquired OfficeMax for $1.2 billion, still has to get a nod from the Federal Trade Commission. And Office Depot shareholders, who will own about 16 percent of the combined company, have to approve it.
In the proposed deal, Office Depot Inc. shareholders will receive $7.25 in cash and 0.2188 of a share in Staples Inc. for each share at closing. The transaction values Office Depot at $11 per share, which is based on Staples' Monday closing stock price — the last trading day before initial reports of a buyout began to leak. The companies put the deal's equity value at $6.3 billion.
On news of the deal, which is expected to close by year's end, shares of Staples fell $2.28, or 12 percent, to close at $16.73. Office Depot's stock added 20 cents, or 2 percent, to close at $9.48.
The combined company, which will have 4,000 stores, means the two retailers no longer have to compete. Annual sales of the new office-supply giant are expected to approach $39 billion. Additionally, Staples expects to realize at least $1 billion in annual cost savings by the third full fiscal year after the transaction is complete.
Ron Sargent, Staples CEO and chairman who will retain his roles in the combined company, said the acquisition enables Staples to "more effectively compete in a rapidly evolving competitive environment."
Sargent said it's too early to talk about integration plans for the company, but Staples and Office Depot each plan to close stores this year. Staples previously announced that it would close up to 225 stores by the end of 2015, and Sargent said Wednesday that those plans haven't changed. Office Depot CEO Roland Smith said the chain is looking to close 135 stores this year.
David Marcotte, senior vice president of retail insights at Kantar Retail, a consultancy, believes the combined footprint of both chains will be reduced by half in the next few years and combined sales will be trimmed by a quarter. He believes the future will be small stores tied to the Internet.
"The physical will give away to the virtual," he said.
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This is a transformational acquisition which enables Staples to provide more value to customers, and more effectively compete in a rapidly evolving competitive environment.
–Ron Sargent, Staples CEO and Chairman
Staples did touch on some of those monopoly issues Wednesday, saying that it's not required to close the deal with Office Depot if antitrust authorities require divestitures that deliver more than $1.25 billion of Office Depot's 2014 revenues in the U.S. or if a requirement of the antitrust authorities has a material adverse effect on Office Depot's operations outside of the U.S.
While Sargent said it's too early to talk about specific integration plans for the company, Staples and Office Depot each plan to close stores this year. Staples previously announced that it would close up to 225 stores by the end of 2015. Sargent said Wednesday that those plans haven't changed. Office Depot CEO Roland Smith said the chain is looking to close 135 stores this year.
In the proposed deal, Office Depot Inc. shareholders will receive $7.25 in cash and 0.2188 of a share in Staples Inc. at closing. The transaction values Office Depot at $11 per share, which is based on Staples' Monday closing stock price — the last trading day before initial reports of a buyout began to leak. The companies put the deal's equity value at $6.3 billion.
Office Depot shareholders will own about 16 percent of the combined company.
Framingham, Massachusetts, where Staples is based, will serve as headquarters for the combined company. Sargent said that Staples will maintain a presence in Boca Raton, Florida, where Office Depot is based.
Staples expects to realize at least $1 billion in annual cost savings by the third full fiscal year after the transaction is complete.
"These savings will dramatically accelerate our strategic reinvention which is focused on driving growth in our delivery businesses and in categories beyond office supplies," said Sargent, who will be chairman and CEO.
The companies said Wednesday that they began negotiating in September, perhaps attempting to diminish what was seen as pressure on Staples from activist investors to do just that.
Hedge fund Starboard Value LP disclosed a 5.1 percent stake in Staples in December and last month began publicly urging it to make a move on Office Depot.
The deal is expected to close by year's end, but still needs approval from Office Depot shareholders. Once the closing occurs, Staples board will increase from 11 to 13 members and include two Office Depot directors approved by Staples.
Staples said that it is temporarily suspending its stock buybacks so that it can concentrate on paying down debt related to the deal. It has agreed to pay a $250 million termination fee if the deal is called off due to antitrust roadblocks. There will be $1 billion in one-time costs related to the transaction.
Shares of Staples shed fell $1.39, or 7.3 percent, to $17.62 in morning trading. Office Depot's stock added 26 cents to $9.54.
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