Staples Inc. could face costly concessions in order to convince federal regulators a $6.3 billion deal to acquire Office Depot Inc. would not seriously restrict competition in the sale of office supplies to commercial customers, a leading antitrust watchdog group said.
The proposed merger of the two largest remaining US office superstore companies requires the approval of the Federal Trade Commission. Individual customers may know the companies for their thousands of stores operating across America, but analysts believe antitrust regulators are focused on the proposed merger's impact on contract business serving large US companies.
"To cure the anticompetitive threats, you'd have to divest operations to create a national competitor," said Randy Stutz, associate general counsel at the American Antitrust Institute in Washington. "You're talking about giving up extremely valuable assets and huge numbers that almost make the deal not worthwhile at that point."
Framingham-based Staples would have to essentially divest large parts of its contract division, such as distribution centers or relationships with certain clients, to another competitor in order to convince the FTC that other viable businesses exist in the post-merger market, Stutz said.
He said that W.B. Mason, a private company based in Brockton, is the next-largest office supplier in the US contract business, after Staples and Office Depot. W.B. Mason "does not even come close to operating on a comparable scale" and serves only particular regions of the country, he said.
Staples declined to comment on antitrust questions, other than to say it continues to work with regulators reviewing the proposed merger. Chief executive Ron Sargent, speaking Wednesday at an investor conference hosted by Goldman Sachs, described the merger as remaining "on track."
In response to a question, Sargent said that half of Staples' contract sales with big companies involved products other than traditional office goods, such as break-room supplies. He said Staples currently competes with many other companies besides Office Depot for sales of those other products.
"So, if you start to look at the market as beyond office supplies, which is what we do, obviously the market gets a lot bigger and our share gets a lot smaller," he said.
Office Depot, based in Boca Raton, Fla., declined to comment about antitrust issues. W.B. Mason did not respond to interview requests.
The FTC has not publicly discussed its review of the merger, but it issued a second request for information from both companies about the proposed deal in March. A second request is generally issued "if the initial review has raised competition issues" and is intended to help regulators "take a closer look at how the transaction will affect competition," according to FTC guidelines.
The business of serving large companies on a contract business is important to both Staples and Office Depot.
Staples has reported commercial sales of more than $4 billion through the first half of this year, roughly equal to its revenue from selling products to individual customers in stores and online. But the commercial business generated operating profit of $272 million, more than double the retail business's operating income of $103 million.
The commercial operations reported by Staples include both the retailer's contract business with big companies and the operations of its Quill subsidiary, an Internet and catalog service catering to small and mid-size companies. Staples said its contract commercial business serves about 270,000 customers, including about half the Fortune 1000 and more than 65 percent of Fortune 100 companies.
At Office Depot, commercial business generated revenue of $2.9 billion and an operating profit of $128 million over the same six months. The company's retail operations produced similar sales and earnings.
The FTC blocked a merger proposal between the same two companies in 1997, citing concerns about retail competition at office supply stores. Those issues have since waned because Staples and Office Depot lost market share in the consumer business to a wide range of competitors, including Wal-Mart Stores Inc., Target Brands Inc., BJ's Wholesale Club Inc., Sam's Club, and Amazon.com, said stock analyst Oliver Wintermantel of Evercore ISI, who follows Staples
Like Stutz, Wintermantel believes commercial business will raise questions for regulators, but he isn't convinced that a lack of competition for major contracts would be enough to block the deal.
Wintermantel said he wasn't sure the FTC cares if a "company like J.P. Morgan can buy Post-it notes for a cheaper price." Historically, the agency has been more worried about the fate of small to medium-sized businesses or average consumers, he said.