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Office Chains In Merger Talks: Reports

New York — Office Depot and OfficeMax, the No. 2 and 3 office-supply chains, are far along in merger talks and may announce a deal this week, according to published reports.

A merger, long urged by analysts, could create a stronger challenger to channel leader Staples, although all three chains have lost ground to online and discount competitors like Costco and Walmart.

Discussions may have been spurred by activist fund Starboard Value LP, which became Office Depot’s largest shareholder in September.  Starboard has been urging CEO Neil Austrian to improve operating performance by cutting costs and reducing store size, Bloomberg reported, and supports the idea of a merger.

During their most recent quarters Office Depot lost $70 million and sales declined 5 percent while OfficeMax reported a 19 percent drop in operating income and a 1.2 percent sales slip.

OfficeMax is scheduled to report its fourth-quarter results on Thursday, followed by Office Depot one week from today.

The deal is expected to take the form of a stock-swap according to the Wall Street Journal, which broke the story yesterday. Neither chain would comment on the reports, which were attributed to people familiar with the matter.

Office Depot is the 17th largest CE retailer, with $1.5 billion in tech sales in 2011, according to TWICE’s Top 100 CE Retailers Report. OfficeMax ranked 23rd with $708 million in CE sales, and both trailed 15th place Staples, which sold $1.9 billion worth of electronics in 2011.

Janney Capital Markets analyst David Strasser believes a merger would save both chains upward of $500 million in overlapping expenses, although at least 500 redundant stores would have to be closed or sold at an estimated cost of $300 million. The companies would also face the challenge of integrating different back-office technologies and corporate cultures, and receiving regulatory approval from the U.S Federal Trade Commission, which scuttled a Staples-Office Depot merger in 1997.

Staples, and to a lesser extent Best Buy and the discount chains, would all reap short-term benefits from a merger, gaining market share from the store closures and the distractions of the integration, Strasser said in a research note.