Retail

Staples, Office Depot tank on failed merger

Staples, Office Depot call off $6B deal
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Staples, Office Depot call off $6B deal

Shares of Office Depot and Staples plummeted Wednesday, as analysts called into question the office supply chains' ability to effectively compete in the market as stand-alone companies.

Following a judge's decision that the two companies may not merge, Office Depot — which was downgraded by Jefferies from "buy" to "hold," and from "neutral" to "sell" at UBS early Wednesday — fell about 40 percent to below $4 a share. Staples stock, which was downgraded by both Jefferies and UBS from "buy" to "hold" status, tumbled more than 18 percent to below $9 a share.

"Without the benefit of synergies, both Staples and Office Depot have less appealing profit outlooks," Jefferies analyst Daniel Binder told investors. "They will continue to face secular declines, and each company's business is vulnerable to competition from online and nonoffice supply retailers."

SPLS (green) and ODP (blue) in 2016

Source: FactSet

Without cost savings and other merger benefits, the two stores will see an increasing threat from Amazon, said BB&T analyst Anthony Chukumba, who maintained his "hold" rating on Staples.

Amazon's encroachment on their turf was one of the key points the companies argued while trying to muscle through their $6 billion merger.

Chukumba told investors he is becoming "increasingly worried" about Amazon Business, which recently said it raked in more than than $1 billion in revenue in less than one year of business, and is growing its sales at nearly 20 percent a month.

"We believe Amazon Business' meteoric rise further undermines the FTC's claim that Fortune 100 companies would have no other post-deal alternatives than to purchase office supplies from a combined Staples/Office Depot," Chukumba said.

For its part, the FTC on Tuesday said in a statement, "Today's court ruling is great news for business customers in the office supply market. 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."

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Though analysts expressed concerns regarding Staples and Office Depot's future, they were decidedly more optimistic on the former. Staples has already laid out what Chukumba called an "aggressive restructuring plan," which includes shuttering more North America stores, beefing up its business-to-business offerings, and exploring strategic alternatives for its "underperforming" European business.

UBS analyst Michael Lasser added that Office Depot's business was likely weakened by the distraction of its potential acquisition, saying "it will take time for Staples' main competitor to recover."

Office Depot has not disclosed details of its plans, but may have more to say on a conference call Monday.

"Both companies will now focus both eyes on 'us' versus 'them,' whereas before it was likely one eye on 'us' versus 'them' and one eye on 'us' and 'them,'" said Charlie O'Shea, Moody's lead retail analyst. "From our perspective, the next several days will tell us a lot regarding where each company will head next, and how they plan to get there."


Former Office Depot CEO on blocked Staples deal
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Former Office Depot CEO on blocked Staples deal

Former Office Depot CEO Steve Odland said the FTC's decision only served to protect large corporate office supply buyers and seemingly failed to acknowledge the existence of Amazon or the very internet itself.

The ruling could be the end for Office Depot, said Odland, who remains a shareholder.

"They have nowhere to go now," he told CNBC's "Squawk on the Street" on Wednesday. "I think that they're going to have to try to sell the company off in pieces in order to recoup the value."