The Federal Trade Commission is strongly criticizing Staples' (SPLS) proposed remedy for antitrust problems created by the company's plan to acquire big-box office supply retail competitor Office Depot (ODP - Get Report) .
"The proposed fix cannot salvage this merger," the FTC said in a brief made public late Friday. A version containing confidential business information was filed Feb. 16, the day Staples and Office Depot formally announced an agreement to sell more than $550 million in large corporate contract business and related assets to Essendant (ESND) . The sale to Essendant had been proposed to the FTC before the agency filed its legal challenge to stop the Office Depot acquisition on Dec. 7. The sale is contingent upon Staples receiving antitrust clearance from the FTC or the court for the Office Depot deal.
The spinoff to Essendant, for which Staples would be paid $22.5 million, would comprise a book of business containing more than 25% of its revenue from Fortune 100 companies and approximately half of its revenue from Fortune 500 companies.
The commercial business and assets that would be divested are primarily accounts in which Staples and Office Depot act as wholesalers to minority- and woman-owned office supply resellers. Staples said the sale "will significantly increase Essendant's presence with large corporate customers, improve Essendant's capabilities, and further enable independent dealers in combination with Essendant to more effectively compete for national account business."
Observed Ron Sargent, Staples chairman and CEO: "Our agreement with Essendant strengthens a national competitor, further enables independent office products dealers, and helps minority and woman-owned businesses compete for national commercial customers."
When the FTC challenged the merger two months ago, the agency said the Office Depot acquisition was anticompetitive because the two companies were their closest competitors in the sale of consumable office supplies to large business customers. In fact, according the numbers from the commission's Feb. 16 brief, they would hold a combined 79% of that market and would be roughly 15 times the size of their next largest competitor, regional office supplies vendor W.B. Mason. The FTC noted that W.B. Mason's primary product is paper and the company does not carry the full array of supplies that businesses need.
The FTC took a dim view of the proposed sale to Essendant as a fix to those problems. The FTC noted that the business to be divested is a niche service that helps customers satisfy state or federal minority contracting requirements or meet customers' diversity goals.
The commission said the divestiture is not substantial enough to maintain competition at its pre-merger level. The companies' business with the female and minority vendors, known in federal contracting parlance as Tier 1 diversity vendors, are short-term partnerships that expire when their contracts terminate. When the contracts expire, the vendors would be free to return to the Staples/Office Depot fold rather than continue with Essendant. "Essendant would retain no assets to enable it to compete more effectively for large customers," the FTC said.
The FTC also complained Essendant does not currently sell directly to business customers and will not be able to provide the level of distribution Office Depot now provides. "Thus, by definition, the divestiture cannot replace the competition from Office Depot that would be eliminated by the merger."
Staples has defended the merger on grounds that the FTC's 2013 approval of Office Depot's acquisition of the OfficeMax takeover with no conditions obliges the commission to approve this office supply merger, too. Three years ago the FTC found the office supply business is no longer dominated by specialty retailers with huge brick-and-mortar locations and meaningful competition is now coming from online outlets like Amazon.com (AMZN - Get Report) , discount clubs like Costco (COST - Get Report) and even general retailers like Walmart (WMT - Get Report) .
But in its brief last week the FTC said the current deal "would eliminate Staples as a counterwieight to the combined Office Depot-Office Max" and that online providers such as Amazon aren't significant competitors when it comes to supplying businesses, the segment harmed by the latest takeover.
A trial before U.S. District Judge Emmet Sullivan to determine the FTC's request for a preliminary injunction halting the Office Depot merger is scheduled to begin March 21. Ostensibly on May 10 the FTC is scheduled to follow that proceeding with its own in-house administrative trial to determine the permanent fate of the merger. However, the losing side in the preliminary injunction proceeding is expected to drop its fight after Judge Sullivan rules.