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 user 2010-05-10 at 10:09:36 am Views: 57
  • #23515

    Depot and ‘Max discussing

    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.

    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