Staples Inc. is expected to gain new customers and bolster its market dominance if Office Depot’s proposed takeover of OfficeMax goes through, according to retail analysts.
Office Depot on Wednesday unveiled a $1.2 billion bid for OfficeMax — an attempt by the smaller rivals to better compete against the Framingham chain, which is the largest office supplies chain with about 2,300 stores worldwide and 39 percent of the US market, according to IBISWorld, a market research firm.
Staples would benefit from the proposed takeover because the deal would likely result in hundreds of store closures where OfficeMax and Office Depot have overlapping outlets, analysts said. There will also be less competition for Staples when vying for business contracts to provide office products to corporations.
“This would not be a good deal for Staples — this would be a great deal for Staples,” said Anthony Chukumba, an analyst with BB&T Capital Markets.
Office Depot, which reported Wednesday that sales for the Florida-based chain dropped 7 percent to $10.7 billion in 2012, has faced increasing pressure to reduce costs after Starboard Value LP, an activist fund, became Office Depot’s largest shareholder last fall. Office Depot’s all-stock offer for OfficeMax is expected to close by the end of the year and create a combined company with $18 billion in annual sales.
“In the past decade, with the growth of the Internet, our industry has changed dramatically,” Neil Austrian, Office Depot’s chief executive, said in a statement. “Combining our two companies will enhance our ability to serve customers around the world, offer new opportunities for our employees, make us a more attractive partner to our vendors, and increase stockholder value.”
Retail analysts say Staples should pick up new customers in markets where OfficeMax and Office Depot shutter existing stores. It is unclear how much Staples could improve profits by increasing prices because the company still faces stiff competition online from Amazon and growing pressure from warehouse clubs and traditional retailers that are putting more emphasis on the sale of office products.
‘Staples, which we believe will benefit from this transaction, remains our favorite idea in the office supply retailing space.’
Staples founder Tom Stemberg, who is no longer associated with the company, said there used to be significant price differences across the country but that has changed dramatically because of the Internet and the rise of Walmart in the office supplies market.
“I don’t think consumers will see any negative price effect,” Stemberg said.
Staples spokesman Owen Davis declined to comment. In September, the company detailed a $250 million cost-cutting plan to close stores, reduce the size of existing locations, and restructure its overseas businesses.
Retail analysts for years have raised concerns about the saturation of the office supplies market, claiming there was insufficient demand to sustain three major chains. Staples attempted to buy Office Depot in 1997, but the deal was blocked by the Federal Trade Commission because of concerns the combined business would have too much of an advantage over competitors.
“There has been too much supply in terms of number of stores and competitors,” said Michael Baker, a retail analyst with Deutsche Bank Securities.
Retail analysts said it is too early determine whether a combined Office Depot and OfficeMax will emerge as a stronger player, given that a leader has not been named. The next chief executive will be picked by a newly constituted board of directors that will include equal representation and governance rights from each of the two companies.
“We are concerned the uncertainty regarding critical future decisions — as well as the 50/50 board composition — could make what we assumed would be a long and difficult integration process even more challenging,” Chukumba wrote in a report Wednesday. “Staples, which we believe will benefit from this transaction [including from the resulting smaller North American retail footprint and having one less competitor to bid against for large delivery contracts], remains our favorite idea in the office supply retailing space.”
Shares of Staples Inc. jumped Tuesday after rumors of the proposed deal surfaced, but pulled back Wednesday after the merger was confirmed to close at $13.60 on the Nasdaq exchange, down more than 7 percent.