This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

Office Depot, OfficeMax Merger: 'It's About Damn Time'

NEW YORK (TheStreet) -- After reports over the weekend indicating Office Depot (ODP) and OfficeMax (OMX) are about to announce a merger, investors and analysts appear to be saying: "Finally."

A potential merger could help alleviate the operating struggles of big-box office retailers OfficeMax, Office Depot and Staples (SPLS), amid overexpansion and a change in the marketplace with the rise of smaller suppliers such as W.B. Mason and new entrants as big as Wal-Mart (WMT), Costco (COST) and Amazon (AMZN).

"It's about damn time," Oppenheimer retail analyst Brian Nagel said, quoting basketball star LeBron James, in a note to clients evaluating a proposed merger.

"An [Office Depot and OfficeMax] combination would spur a rationalization of excessive office products retailing real estate and render the sector more capable of managing through a challenged product cycle and competing with new entrants such as Amazon.com," Nagel said.

Investors in Office Depot, OfficeMax and Staples are taking the merger speculation of the industry's number two and three leading players as a positive sign for office suppliers.

Shares of Office Depot (ODP) and OfficeMax (OMX) spiked in trading Tuesday on the reports of advanced merger talks. Office Depot surged over 9% to $5.02, while OfficeMax climbed over 20% to $13. Staples, which could be a beneficiary of a deal, rose over 13% to $14.65.

The key to a potential merger and an improving outlook for all players involved centers on store closings, operating synergies and asset disposals, according to industry analysts. Meanwhile, the work of activist funds such as Starboard Value, Office Depot's largest shareholder, may have helped to put companies in a position to try a merger.

"We believe that a merger has made sense for years and that the recent monetization of key assets provides the necessary cash flow to pay for the integration costs," Gary Balter of Credit Suisse wrote in a note to clients that cites OfficeMax, Office Depot and Staples.

"The synergies will not include higher pricing given the Internet and other pressures, but fewer store locations fighting for sales, lower distribution costs for OMX and ODP, and potential share gains by [Staples] during the near-term disruption of integrating two disparate systems."

Already, Office Depot is in the process of implementing a three-year plan to cut costs that the company projects will add $300 million to its earnings before interest and taxes. Those expense reductions, and between $480 million to $580 million in merger-related savings, could mean that the merged company could see over $700 million in synergies, according to calculations by Daniel Binder of Jefferies.

"With Office Depot and OfficeMax having closed numerous stores in recent years, plus a potential $1 million to $2 million cash cost to close additional stores, we suspect a lot of the future closing opportunities will come as leases come up for renewal," Binder wrote in a note to clients that forecasts roughly 52% of Office Depot's stores overlap with those of OfficeMax.

Were the merged entity to close or discontinue those stores, Binder calculates Staples could gain up to 30% of those sales, or up to $60 million in revenue annually.

1 of 2

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,960.57 -123.23 -0.72%
S&P 500 1,978.34 -9.64 -0.48%
NASDAQ 4,449.5640 -22.5440 -0.50%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs