(By Balaseshan) Office Depot Inc. (NYSE: ODP) has agreed to buy smaller rival OfficeMax Inc. (NYSE: OMX) for $1.17 billion in stock as both the companies face pressure to increase profitability.
Office Depot will issue 2.69 new shares of common stock for each outstanding share of OfficeMax common stock.
The combination is expected to spur a rationalization of excessive office products retailing real estate and render the sector more capable of managing through a challenged product cycle, istockanalyst had noted.
The deal, which would merge the number two and three players in the industry, could create an effective and efficient competitor to new entrants such as Amazon.com Inc. (NASDAQ: AMZN) and heavyweight Staples Inc. (NASDAQ: SPLS) by cutting costs via closing overlapping stores and workforce.
Starboard Value, which owns about 15 percent stake in Office Depot, has been pressuring to increase profitability and cut costs leading the company to adopt a 'poison pill' in the form of a shareholder rights plan to defend itself against hostile takeover.
Boca Raton, Florida-based, Office Depot operates nearly 1,700 global stores, are expected to generate 2012 sales of about $10.88 billion, while Naperville, Illinois-based OfficeMax operates about 900 stores in the U.S. and Mexico, annual sales are estimated at $6.97 billion. Analysts reportedly expect the deal to generate cost synergies in a range of $400 million to $700 million.
The combined company would have had pro forma combined revenue of roughly $18 billion for the year ended December 2012. The companies expect the merger to deliver $400 to $600 million in annual cost synergies by the third year following the close of the deal.
The merger stands a better shot at regulatory approval than the 1997 bid by Staples to purchase Office Depot, the Forbes reported, quoting analysts.
"We assume that any deal would be structured as primarily a merger of equals with OMX more of the acquiree. At this juncture, we have yet to determine a potential deal value," Oppenheimer analyst Brian Nagel wrote ahead of the merger announcement.
The deal is expected to close by the end of calendar year 2013.
ODP shares jumped 8.57 percent to $5.45, while OMX shares rose 6.08 percent to $13.79 in early Wednesday trading.