Staples, Office Depot deal called off after federal injunction to block $6.3 billion merger

More than 15 months after two of the nation’s largest office supply chains announced their intentions merger, Staples Inc. and Office Depot have called off their $6.3 billion marriage ahead of a May 16 terminate deadline and amid antitrust concerns complaints from the Federal Trade Commission.

Staples said Wednesday it will terminate its merger agreement with smaller rival Office Depot on May 16 after the U.S. District Court for the District of Columbia’s on Wednesday granted the FTC’s request for a preliminary injunction to block the acquisition.

Both companies were reluctant to divulge details of their Arkansas operations, but information on the companies’ website detail at least 16 Staples, Office Depot and OfficeMax locations in Arkansas, with Fort Smith, Conway, Northwest Arkansas and the Little Rock metro area each with more than one store location.

Under the terms of the merger agreement, Staples will pay Office Depot a $250 million break-up fee. Staples said it also plans to axe its agreement to sell more than $550 million in large corporate contract business with minority and women business owners to Essendant to satisfy federal antitrust concerns involving the Office Depot deal.

“We are extremely disappointed that the FTC’s request for preliminary injunction was granted despite the fact that it failed to define the relevant market correctly, and fell woefully short of proving its case,” said Staples Chairman and CEO Ron Sargent. “We believe that it is in the best interest of our shareholders, customers, and associates to forego appealing this decision, terminate the merger agreement, and move on with our strategic plan to drive shareholder value. We are positioning Staples for the future by reshaping our business, while increasing our focus on mid-market customers in North America and categories beyond office supplies.”

In a separate news release, Office Depot Chairman and CEO Roland Smith said his company would not appeal the federal court’s decision. The Office Depot chief executive, who would have received a $46.8 million payout if the deal was approved, now says he is looking toward “re-energizing” his company’s business.

Staples’ Sargent said his company will refocus on revamping its mid-market products and services to companies with 10-200 employees, and plans to explore “strategic alternatives” for its European operations. To increase productivity and profitability at its retail stores, Staples said it also plans to close at least 50 stores in North America. Since 2011, Staples has close more than 300 of its stores in North America, company officials said.

In addition, Staples said it initiating a new multi-year cost savings plan which is expected to generate approximately $300 million of annualized pre-tax cost savings by the end of 2018. The company will primarily focus on reducing product costs, optimizing promotions, increasing the mix of Staples Brand products, and reducing operating expenses.

The Staples-Office Depot deal, first announced on Feb. 4, 2015, hit a wall in late December when the FTC filed a federal administrative complaint charging that Staples’ proposed $6.3 billion acquisition of slightly smaller rival Office Depot.

The FTC said that Framingham, Mass.-based Staples – the world’s largest seller of office products and services – and Boca Raton, Fla.-based Office Depot are each other’s closest competitors in the sale of consumable office supplies to large business customers.

“Today’s court ruling is great news for business customers in the office supply market,” said Debbie Feinstein, director of the FTC’s Bureau of Competition. “This deal would eliminate head-to-head competition between Staples and Office Depot and likely lead to higher prices and lower quality service for large businesses that buy office supplies.”

According to FTC’s original complaint, the merger would violate the antitrust laws by significantly reducing competition nationwide in the market for “consumable” office supplies sold to large business customers.

The termination of the Staples-Office Depot deal is the another win for the Obama administration’s antitrust efforts, and the second multibillion dollar corporate deal to end up on the scrap heap in 2016. Earlier this month, oil service giants Halliburton Co. and Baker Hughes Inc., both of which played key roles in providing technology to help drillers ramp up the Fayetteville Shale, terminated their $35 billion merger over competitive concerns from U.S. antitrust regulators.

Halliburton ended up having to pay smaller Houston-based rival Baker Hughes a $3.5 billion termination fee on May 4.

News of the scrapped office supply deal ignited a huge sell-off of both Staples and Office Depot shares in Wednesday’s session. Office Depot stock has lost nearly 40% of its value before noon on the Nasdaq stock exchange, plummeting $2.34 to $3.74 on volume of more than 103 million, 10 times the normal trade.

Staples’ shares fell as much as 22% in Wednesday’s session at Nasdaq. At midday, Staples’ stock was still down 16%, or $1.64 at $8.72 as nearly 52 million shares traded hands, six times the normal volume almost four hours before market close.