Shares of Staples fall on $6.3B bid for Office Depot

Office-supply chain Staples agreed to buy its sole remaining competitor, Office Depot, in a $6.3 billion-deal that would create one mega-office-supply chain.

But fears of anti-trust opposition sent shares of Staples plummeting 12%, despite applause from investors for the proposal.

The merger, which vows cost savings of $1 billion after closing, must be approved by the Federal Trade Commission. And while the regulator passed a recent marriage between Office Depot bought OfficeMax in 2013, investors are jittery that the FTC could raise questions about joining the last two surviving office supply chains.

"I think they have to fight it," Staples co-founder and former CEO Tim Stemberg said of the FTC's potential view of the merger. Staples faces "potentially a long and nasty legal skirmish" to get it done, Stemberg said on CNBC.

Staples also spooked investors with its closing conditions, which would allow it to walk away if FTC approval of the deal grew too onerous. Staples can back out of the deal, for example, if antitrust authorities require divestiture of assets, such as the sale of store locations, that deliver more than $1.25 billion of Office Depot's 2014 revenues in the United States.

"This is a no-brainer," Anthony Chukumba, retail analyst with BB&T Capital Markets, said of the $6.3 billion-merger. "But Staples has given themselves an out a major out, so I think people are concerned that this deal may not close," Chukumba said.

Shares of Staples closed down $2.28 at $16.73. Office Depot shares rose 21 cents, or 2.2% to $9.49 — well below the proposed merger value of $11 a share.

If the deal is approved, Staples will acquire all of the outstanding shares of Office Depot for $7.25 in cash and 0.2188 of a share in Staples stock. That values Office Depot at $11.00 per share, or a premium of 44% over the closing price of Office Depot's shares as of Feb. 2.

The two companies will boast pro forma annual sales of approximately $39 billion, Staples said. That compares to pro forma sales of $17 billion for Office Depot. Staples reported $23.1 billion in revenue in 2013, a drop of 5.2% drop over its 2012 revenue.

"This is a transformational acquisition which enables Staples to provide more value to customers, and more effectively compete in a rapidly evolving competitive environment," said Ron Sargent, chairman and chief executive officer of Staples.

Chukumba said he thinks the FTC will ultimately approve the deal given the massive changes in competitive landscape since 1997, when the FTC actually blocked a $4 billion merger between Staples and Office Depot.

"This is not 1997 anymore. These guys are not the only games in town," said Chukumba, referring to Walmart, Target and Amazon.com.

Indeed, during a call with investors and analysts Wednesday, Sargent said the deal would allow the company to accelerate its recent price-cutting initiatives to better compete with online retailers.

"I think we have a ways to go to become even more competitive, particularly among some of the online competitors," Sargent said.

The merger, which was approved unanimously by both companies' board of directors, is expected to close by year's end if OK'd by the FTC.

Activist hedge fund Starboard, which has been pushing for a merger, owns a 6% stake in Staples and 10% in Office Depot. Starboard is still in the black on its investment, however, as it bought its Staples stake at between $12 and $14 a share last year, according to regulatory filings.