OfficeMax Deal May Be Good for Everyone

Boise Cascade's management of the retailer could turn into a positive for the top three office suppliers.
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Boise Cascade's (BCC) - Get Report bid to take over OfficeMax (OMX) may actually benefit the competition as much as the struggling office products retailer.

That's the take of several Wall Street analysts, none of whom expects the deal to shake up the office products industry. But in the short term,




Office Depot

(ODP) - Get Report

, the No. 1 and No. 2 players, respectively, could pick up a few OfficeMax and Boise business customers while the two are in limbo waiting to merge, analysts say. And in the longer term, the merger could provide a more solid third competitor, creating a more stable industry less prone to bottom line-busting promotions.

"There will likely be a more rational, but more equal, competitive environment," said Colin McGranahan, who covers Office Depot and Staples for Sanford Bernstein. "There will be a more benign, oligopolistic market."

Boise on Thursday

agreed to buy OfficeMax for about $1.15 billion in a part cash, part stock deal. The agreement, which the companies expect to complete in the fourth quarter, values OfficeMax's stock at about $9 a share, a 25% premium over its Friday close of $7.18.

As part of the deal, Boise, an office products manufacturer, plans to merge OfficeMax with its direct sales business. The companies project the combined 2002 revenue of their retail and direct sales businesses would have been $8.3 billion.

That would put OfficeMax in closer contention to Staples and Office Depot, in relation to which it is currently a distant third. In their respective 2002 fiscal years, Staples, Office Depot and OfficeMax posted sales of $11.6 billion, $11.4 billion and $4.8 billion.

And it would add corporate sales to OfficeMax's business. Although corporate sales are seen by many as a key offering by office supply retailers, offering a fast-growing and profitable business segment, OfficeMax has only a small presence in the corporate business, focused on its CopyMax photocopying centers.

The deal could also help shore up OfficeMax's bottom line. Staples and Office Depot have both posted strong profits in each of the last three years. In contrast, OfficeMax posted big losses in its 2001 and 2000 fiscal years amid a restructuring and store closings.

Of course, the deal is not a guaranteed home run for Boise.

The company has little experience in the retail space, notes Jeff Matthews, general partner of Greenwich, Conn.-based investment firm Ram Partners and a contributor to the

Street Insight

Web site. Meanwhile, Boise, which is not known as a well-managed company itself, is buying the weakest of the three office supply chains, he said.

"You could argue that now it will be run even more poorly than it was before," said Matthews, whose firm is long Office Depot.

But OfficeMax will likely benefit from the deal if it means that OfficeMax CEO Michael Feuer is no longer running the show, Matthews said. Matthews attributed a slew of bad business decisions to the former CEO that led to stores with too much inventory and poor customer service.

But the deal could be good for the competition as well, analysts say. In a note on Monday, Lehman Brothers' Jeff Black estimated that integrating Boise and OfficeMax's operations could take six months to complete following the expected fourth-quarter close of their deal.

(Lehman Brothers is acting as a financial adviser to OfficeMax on the merger.)

That means the two companies could be in limbo for the next year. Staples and Office Depot may be able to use that window of opportunity to lure away some of the corporate clients of OfficeMax and Boise, said McGranahan.

Staples and Office Depot also could stand to benefit in the longer term. As a bigger player under different management, the combined Boise-OfficeMax entity will likely make better moves, said Matthews. That means the recent move by the big players to cut back on square footage growth could continue, he said.

One of the criticisms of OfficeMax in recent years has been that its restructuring didn't go far enough, said Fran Radano, a buy-side research analyst at Gartmore Global Investments, which is long Office Depot. After taking over OfficeMax, Boise could well close more of the retailer's underperforming stores, while opening stores in areas with less competition, he said.

"The net effect would be positive for the industry," Radano said. But Radano and others expect that any benefits of the deal will be at the margins, especially for the top two competitors.

"I think this will be neutral over the long run," said McGranahan.