Staples’ remedy for Office Depot rejected by U.S.

David McLaughlin
Bloomberg News

Staples Inc. will have to do more to smooth government opposition to its proposed takeover of Office Depot Inc. The U.S. rejected its latest attempt to win antitrust approval.

Staples offered to transfer commercial contracts worth up to $1.25 billion, up from $500 million previously, but still failed to sway antitrust officials, the company said in a statement Monday.

The rejection by the Federal Trade Commission raises the stakes for Staples and Office Depot, which have said a drawn-out administrative challenge will kill the deal. The FTC says that the tie-up of the No. 1 and No. 2 office-supply retailers will eliminate competition and raise prices for corporate customers that purchase under contract.

The two companies forged the merger, announced in February, under pressure from activist investor Starboard Value. Staples CEO Ron Sargent said at the time the transaction would help it cope with a changing competitive environment and save at least $1 billion in costs.

The FTC filed an antitrust lawsuit against the transaction Dec. 7 and will ask a judge to block the deal at a trial set to begin March 21 in Washington. It’s the second time in nearly 20 years the agency has sued to stop a tie-up between the companies. The FTC won that lawsuit in 1997. In 2013, it cleared Office Depot’s takeover of OfficeMax, leading some to believe it wouldn’t challenge a new Staples bid for Office Depot.

Antitrust opposition to the $6.3 billion deal comes amid a merger wave sweeping across industries from beer to drug stores to pharmaceuticals under scrutiny from officials at the FTC and the Justice Department.

At a court hearing last week, FTC lawyer Tara Reinhart said the agency has told the companies that it’s concerned that they are merely transferring contracts and not divesting physical assets.

If the FTC just wants physical assets such as distribution centers sold, that may make a settlement easier than if it’s also worried about the ability of the buyer to compete effectively, said Jennifer Rie, an antitrust analyst at Bloomberg Intelligence in New York.

“If it’s just a matter of more assets, then a settlement is likely doable here,” she said.

The FTC seeks a federal court injunction against the deal pending a trial in its administrative court, scheduled to begin in May. Office Depot lawyer Matt Reilly reiterated at last week’s hearing that the deal can’t survive past the federal court process.

Staples said that it’s willing to negotiate further with the FTC to reach a settlement that addresses its concerns. The Framingham, Massachusetts-based company said it would contest the FTC’s lawsuit in court in order to complete the transaction.

“The company is confident in its legal position and looks forward to a full and impartial judicial review of the matter,” Staples said in the statement.