Is the Staples and Office Depot Merger Really at Risk?

Source: Thinkstock Merger arbitrage and speculation often drive massive inflows and outflows of capital around merger rumors, and they can also have a high impact in actual pending mergers as well. Now there is an unusual development in the Staples Inc. (NASDAQ: SPLS) acquisition of Office Depot Inc. (NYSE: ODP) — tied to Sysco Corp. (NYSE: SYY), a food sales and distribution company.

Does a blocked food sales and distribution network really matter to an office supplies retail merger? In this case, very much so.

It turns out that the U.S. District Court in the District of Columbia granted the Federal Trade Commission’s request for a preliminary injunction to block Sysco’s proposed merger with U.S. Foods. What matters here is that this represents yet another blocked merger, and this was a pending merger for what Sysco said was almost two years.

24/7 Wall St. recently warned that, despite getting shareholder approval by Office Depot holders, the Office Depot and Staples merger still has many hurdles to overcome.

Under the proposed merger terms, Office Depot shareholders will receive $7.25 in cash and 0.2188 of a share in Staples stock for each Office Depot share. There is currently greater than a 17% merger-arb spread in the Office Depot share price. That represents a much larger than normal merger-arb spread, versus deals that are expected to close.

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Even when Office Depot said its shareholders voted overwhelmingly to approve the deal, the company said that the transaction is expected to close by the end of the calendar year 2015. That leaves roughly six more months — and we first brought up regulatory concerns back in February.

Why investors have to be concerned here is that the office supplies space already saw consolidation when Office Depot acquired OfficeMax. Now the move is to push three top office supplies stores into one. There is a stronger argument than ever now that they will not dominate the office supplies space. Amazon and many online-only sources have been a constant irritant to these companies. Drugstores, big-box retailers, grocery stores, private chains, Best Buy and tech retailers, and giant destinations like Target and Wal-Mart have all eaten into the office supplies space for more than two decades.

Still, there are some extra risks now in this merger. This means that there will be no Easy Button today. Now investors in both companies will have to decide how they feel about the fiscal profitability of two less profitable cut-throat competitors forced against each other.

Office Depot shares were last seen down 2.4% at $8.89, which would mark the lowest closing price going back to when this deal was confirmed in early February. Prior to the deal announcement, Office Depot shares were trading at $7.63. The stock has a 52-week range of $4.26 to $9.77, and its consensus analyst price target is $10.66.

Shares of Staples were down 3.2% at $16.09 on last look, within a 52-week trading range of $10.70 to $19.40. Staples has a consensus target of $18.86. Shares were trading at $17.02 the day before it announced plans to acquire Office Depot, and they briefly went up to $19.00 before selling back off after it announced this acquisition.

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