No U.S. antitrust guarantees for Office Depot, OfficeMax merger

Antitrust experts said on Tuesday there were no guarantees that a deal to merge Office Depot Inc, the No. 2 U.S. office supply retailer, with smaller rival OfficeMax Inc would win government approval.

The two companies are in advanced talks to merge and a deal could come as early as this week, a person familiar with the matter said on Monday.

Among antitrust experts polled by Reuters, one said the deal was likely to be approved, two forecast a potential challenge by regulators and four said it was too close to call for now.

The companies, which combined would still trail industry leader Staples Inc, are under pressure to boost profits and shareholder value. A merger would help them cut costs, consolidate stores and boost their clout with suppliers.

A deal would likely be reviewed by the Federal Trade Commission, which specializes in retail mergers, not the U.S. Department of Justice.

The possible combination raises the ghost of a famous antitrust case - the proposed deal to merge Staples with Office Depot. The FTC challenged the deal in court in 1997 and a judge ruled that it would lead to higher prices. It was scrapped.

The FTC's question now would be whether the landscape has shifted so much, in particular because of the rise of Internet sales, that its concerns from 1997 no longer apply.

Staples has 39.9 percent of the U.S. office supply market, Office Depot 19.2 percent and OfficeMax holds 15.7 percent, according to Euromonitor International.


Arguably, competition from and from discount stores such as Target Corp and Wal-Mart Stores Inc mean stiff competition for the office supply powerhouses.

One of the experts polled by Reuters, James Calder, co-chair of the antitrust practice of Katten Muchin Rosenman LLP, said changes in the marketplace meant it would be harder for the FTC to litigate against the current deal than in the 1997 case.

"Staff is going to want to look at the data, in part, the same way it did in 1997 to test if super stores are different than other sellers and to test what effect on pricing there is if any when the stores are close to each other," he said.

Robert Doyle, of Doyle, Barlow and Mazard PLLC, was at the FTC when the agency challenged the earlier merger and said the market has changed totally since then.

"In 1997, the Internet was irrelevant. Internet competition is rampant. Big Box retailers have grown and expanded. They now provide a lot of additional competition," he said when polled by Reuters.

Still, the FTC must assure itself that Amazon and other rivals compete effectively with the office super stores in providing everything from pens and notebooks to furniture and break room supplies to government, businesses and individuals.

OfficeMax noted in a government filing in early 2012 that it considered its competition to be Staples and Office Depot, as well as a range of online and big box stores.

But the crowding-in of direct competitors were its real concern.

"Other large office supply super stores have increased their presence in close proximity to our stores in recent years and are expected to continue to do so," that filing said.

Peter Carstensen, who teaches antitrust at the University of Wisconsin Law School, is skeptical the world has changed so much that the FTC would approve a merger that takes a market of three major competitors down to two.

"The (1997) Staples case says that this is a unique market. My intuition is that this still remains," said Carstensen, who was also among the experts polled.


R.J. Hottovy, an equity analyst at Morningstar, said Amazon initially sold to individuals, but has increasingly gained a foothold among businesses because of its often lower prices.

"This (merger) should get through the FTC this time around. A merger is one of the few ways the companies can hang on and compete in this rapidly evolving retail category," Hottovy said.

Nearly half a dozen Wall Street analysts also played down antitrust concerns on Tuesday, saying that the office supplies landscape has changed markedly in 16 years.

A merger today "would be much more likely to pass FTC scrutiny due to the growth of competition from online players and the mass channel," Barclays analyst Alan Rifkin said.

Investors bid up prices of all three companies on Tuesday. OfficeMax shares jumped almost 21 percent, Office Depot advanced 9.4 percent and Staples closed up 13.1 percent.

Janney Capital Markets analyst David Strasser said the regulatory risk was not as high as it was in the 1990s, but added that local, state and federal governments might worry about their supply costs going up at a time of tight budgets.

"We openly wonder if that will impact any decision" by anti-trust authorities, Strasser said.

The companies did not respond to requests for comment.

(Additional reporting by Alistair Barr in San Francisco.; Editing by Ros Krasny and Andre Grenon)