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 user 2010-05-10 at 10:08:01 am Views: 36
  • #23756
    Depot and ‘Max discussing tie-up?
    Reliable industry sources have indicated to OPI that top level meetings have been taking place between Office Depot and OfficeMax. Could the two companies be looking at a tie-up?Rumours of a merger between Depot and ‘Max are nothing new. It has generally been accepted for some time that some form of consolidation between the big box players is required, notably in the retail channel where the presence of three  office supply chains is regarded as at least one too many. And anyway, paraphrasing the legendary Jack Welch, who wants to be number three in a category?Many observers were predicting early last year that either Depot or ‘Max (or possibly even both) would be forced to file for bankruptcy protection before the year was out. That didn’t happen, and both companies have emerged from the economic wreckage that was 2009 in a relatively healthy financial state and with stronger balance sheets and liquidity levels.However, that doesn’t change the long-term picture in terms of overcrowding in the office supplies retail space as shoppers make fewer trips and retailers such as Wal-Mart and Target continue to take more market share of office supplies.

    ‘Max has taken the route of trying to re-invent itself as a more upmarket destination with its classy new store look, smaller format stores and its focus on more stylish products aimed at female customers. This could be considered something of a gamble if, as the market research firms keep telling us, we are entering an era of consumer thrift.’Max’s challenge will be to keep customers coming through its doors despite potentially higher prices. In its favour, ‘Max has a sizeable number of leases up for renewal and should be able to use the current state of the commercial real estate market to cherry pick locations that best suit its retail strategy (it could also decide to close stores as leases expire without incurring penalties).

    Depot has also been reducing store size with its M2 formats and revamping its product assortments, carrying out extensive line reviews, in an effort to differentiate itself.In terms of store count, there is not much to choose between the two: at the end of 2009, Depot had around 1,150 North American stores, while ‘Max had about 1,000. Retail, of course, is only one side of the coin.’Max’s contract business is actually slightly bigger than its retail at $3.7 billion (although it does include its Canadian Grand & Toy and Australasian operations in its contract results). This puts it on a par with Office Depot, whose North American Delivery division posted sales of $3.5 billion in 2009.Both companies have had issues with their contract divisions over the last couple of years and in 2009 each saw sales decline by around 15 percent compared to the previous year.

    The key issue is that Staples continues to distance itself from its two nearest challengers.The Framingham-based giant went into the recession ahead of its rivals and has come out of the other side with the gap even bigger.Staples’ total North American store count (1,870) is not that far behind the combined Depot and ‘Max total, while North American contract sales – at $9.6 billion – are some 25 percent more than the other two put together.Staples recent results have been considerably better than either Depot’s or ‘Max’s – suggesting that Staples is winning market share – and the North American integration of Corporate Express has gone to plan.Staples has also recently agreed to buy the minority shareholding of Corporate Express in Australia for an estimated $400 million, demonstrating that, even with the debt burden it took on after the Corporate Express takeover in 2008, it has the resources to make further major acquisitions.

    About half of the $300 million in annual synergies that Staples identified from the Corporate Express acquisition was due to its increased purchasing power and being able to renegotiate better contract terms with vendors.A full-blown Depot/’Max merger still looks like a difficult scenario to imagine. Whereas Staples and Corporate Express more or less complemented each other, a marriage between Depot and ‘Max – two similar businesses – is more likely to face tougher and more complicated integration issues that could seriously weaken the resulting entity. Furthermore, after all the recent problems, do they want to face the prospect of another period of upheaval with a merger? Probably not.Of course, they could be forced into such a situation if a third party, such as a private equity firm, came in and bid for both companies. BC Partners has around a 20 percent stake in Office Depot that it bought for a bargain $350 million. It is a company that is used to making multi-billion dollar deals and may view this as an opportune time to make another move in what it shaping up to be a record investment year for the firm.

    It has been suggested that such a move would be blocked by US anti-trust authorities. That’s not certain, however. At a recent investor presentation, OfficeMax CEO Sam Duncan, was at pains to point out that the power channel in the US only accounted for 10 percent of the total market share for office and school supplies. Could this have been with one eye on an imminent announcement on some form of industry consolidation?

    In addition, Steve Odland – who has consistently refused to speculate on industry consolidation in the past – told the Florida press after Office Depot’s recent annual shareholder meeting that he viewed the office supplies market as being “highly fragmented”, which could be taken as a hint that consolidation is on his agenda