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Office Depot, OfficeMax agree to merge

Office Depot Inc. and OfficeMax have agreed to merge in an all-stock deal.

Justin Sullivan/Getty Images

Office Depot Inc. and OfficeMax have agreed to merge in an all-stock deal.

NEW YORK (AP) — Office Depot and OfficeMax are being collated.

The retailers said Wednesday they have agreed to combine in an all-stock deal worth about $1.2 billion that would transform the office-supply retail sector by helping the No. 2 and No. 3 chains compete against industry behemoth Staples.

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The merger marks the first move toward consolidation in an industry that is bloated with stores. It reflects the changing retail landscape as ‘‘big box’’ stores have become outmoded and more people shop online.

‘‘This combination will create a stronger, more global, efficient competitor able to meet the growing challenges of our rapidly changing industry,’’ said OfficeMax CEO Ravi Saligram in a call with analysts.

In a note to investors Tuesday, Credit Suisse analyst Gary Balter suggested that Framingham-based Staples Inc. could gain from the expected merger between Office Depot Inc. and OfficeMax.

The office supply market is oversaturated with stores, and the merger will likely mean that Office and OfficeMax will close some stores.

The end result? “Fewer store locations fighting for sales,” Balter wrote.

Meanwhile, the disruption that would come as Office Depot and Office Max integrated their operations could mean near-term “potential share gains” by Staples, he added.

Staples could use a lift. Normally a strong performer, it has turned in some lackluster numbers of late.

Third-quarter sales were $6.4 billion, a drop of 2 percent in US dollars, Staples said in November. Less store traffic in North American stores and weak sales in Europe were among the reasons cited by the company.

In September, Staples unveiled plans to close some stores, reduce the size of existing store locations, and restructure its overseas businesses. Staples projected that those efforts would save about the company about $250 million annually by the end of 2015.

A short time earlier, media reports surfaced that several private equity firms, including Boston’s Bain Capital and Thomas H. Lee, were considering making bids for Staples.

Staples is the world’s largest office products company with annual sales of about $25 billion, 88,000 employees, and operations in 26 countries.

Still, doubts remain whether the combination of Office Depot and OfficeMax , which has been mulled over in the industry for years, is enough to offset growing competition and a changing retail landscape.

Liang Feng, a Morningstar analyst, said the companies will have a lot of obstacles to overcome to succeed.

‘‘The industry will face longer term structural headwinds with competitors like Amazon, Costco gaining ground and the decline in demand for secular office products like paper, pens and ink,’’ he said.

Office Depot Inc. and OfficeMax, along with bigger rival Staples Inc., were all founded in the 1980s and helped pioneer the big-box boom in the 1990s. They expanded rapidly in the U.S. throughout the decade.

But the rise in competition from web retailers like Amazon.com and discounters like Costco and Wal-Mart has been tough on the sector, leading to decreased sales. In addition, office suppliers were slow to bounce back from the recession, as consumers and small businesses alike cut back on ordering office products.

Over the years, the companies have closed stores, slashed costs and streamlined operations to offset stagnant sales. But the industry was still seen as too bulky.

For years, rumors about possible consolidation have swirled around the sector, which is worth about $21.2 billion, according to research firm IBISWorld Inc. Of that, Staples holds a 35 percent market share, Office Depot has 26.1 and OfficeMax has 15.6.

The Wall Street Journal first reported the possibility of a deal between Office Depot and OfficeMax on President’s Day on Monday, when markets were closed. That sent stock across the sector soaring on Tuesday when markets reopened.

Office Depot reported the terms of the deal in a release on its website early Wednesday morning. But then the company removed it, which caused some confusion.

In a call with investors, Office Depot CEO Neil Austrian said the error was due to the company’s webcast provider inadvertently releasing the company’s earnings release ‘‘well in advance of schedule,’’ which included information about the deal.

Morningstar’s Feng said he doesn’t expect the premature release to damage the companies.

‘‘I don’t think it will cause that much of headache for the companies unless the deal doesn’t go through,’’ he said.

In the deal, Office Depot, based in Boca Raton, Fla., and Naperville, Ill.-based OfficeMax said holders of OfficeMax shares will receive 2.69 shares of Office Depot for every OfficeMax share they own.

That’s equal to about $13.50 per share, based on Office Depot’s $5.02 per share closing price Tuesday, giving the deal a total value of about $1.2 billion. OfficeMax had about 86.7 million shares outstanding as of Oct. 26, according to SEC filings. It is a 3.8 percent premium to OfficeMax’s closing price of $13 on Tuesday and a 26 percent premium to OfficeMax’s closing price on Friday, before word of negotiations leaked out.

Even though Office Depot could hold 54 percent of shares while OfficeMax holds 46 in a preliminary tally, the companies said characterizing the deal as Office Depot buying OfficeMax was wrong. Office Depot’s Austrian said the deal is a ‘‘merger of equals.’’

The combined company’s name, CEO and corporate headquarters are yet to be determined, and both companies’ CEOs are being considered for the top role.

OfficeMax said the move is expected to result in $400 million to $600 million annually in cost savings by the third year of the deal. Both companies will have equal representation on the combined entity’s board. The deal is expected to be complete by the end of the calendar year.

The combined company expects $350 million to $450 million in one-time costs related to the integration.

The deal still has to go through shareholder and regulatory approvals, and office supply mergers have been questioned by regulators in the past. In 1997, Staples attempted to buy Office Depot but the deal was nixed by the Federal Trade Commission due to concerns the combined company would have too much of a competitive advantage in the marketplace.

But OfficeMax CEO Ravi Saligram said the industry has changed so much since 1997 that the companies have a strong case for approval. Amazon was ‘‘embryonic’’ in 1997 and stores like Wal-Mart, Costco and Best Buy were not as big competitors as they are now, he said.

‘‘It’s a totally different landscape,’’ he said.

Consolidation will likely be good for both companies. Office Depot and OfficeMax have been hurt by restructuring costs and continued weak sales.

Office Depot, which has 1,675 stores worldwide, reported a loss of $17.5 million, or 6 cents per share for the three months ended Dec. 29. Excluding one-time items, the company broke even per share. Revenue continued to be weak, falling nearly 12 percent to $2.62 billion.

OfficeMax, which has 900 stores in the US, reported a loss of $33.9 million, or 39 cents per share, as it spent money on a restructuring. Adjusted for one-time costs, however, net income was 16 cents per share. Revenue fell 7 percent to $1.7 billion from $1.84 billion.

Office Depot shares fell 60 cents, or 12 percent, to $4.42 in midday trading, while OfficeMax shares fell 24 cents to $12.76. Staples shares fell 58 cents, or 4 percent to $14.07.

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