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Staples’ Office Depot Buyout Spurred By Shareholder

FRAMINGHAM, MASS. — Activist investor Starboard Value was the catalyst behind Staples’ proposed acquisition of Office Depot, which represents the final leg in office supply- channel contraction.

The hedge fund, which acquired a 6 percent stake in Staples in December and increased its position in Office Depot from 8.6 to 10 percent of shares, put increasing pressure on the competitors to consummate a deal amid stagnant same-store sales that predate the recession, as competition mounted from big-box and online discounters.

Viewing the merger as the best chance to salvage the specialty channel and see a return on its investment, Starboard last month went so far as to threaten “a significant leadership change” at Staples if no action were taken.

Based on past moves it would have no doubt acted on its threat. The firm, which also pressed for a merger between Yahoo and AOL in September, last year ousted the entire board at Darden Restaurants, which operates the Olive Garden and LongHorn Steakhouse chains.

The Office Depot deal carries a purchase price of $6.3 billion in cash and stock, and would give Staples $39 billion in annual sales and generate at least $1 billion in savings through store closings, headcount reductions, lower administrative costs and greater purchasing, marketing and supply-chain efficiencies.

Both chains currently operate about 2,000 stores each worldwide, with the majority located in the U.S.

“This is a transformational acquisition which enables Staples to provide more value to customers, and more effectively compete in a rapidly evolving competitive environment,” said Staples chairman/CEO Ron Sargent.

Under a definitive agreement reached between the two remaining office-supply chains, Staples’ board would gain two Office Depot directors, Sargent would continue as chairman and chief executive, and company headquarters would remain here in Massachusetts.

In an investor presentation earlier this month, Staples said its board and senior management team began spitballing a buyout last summer and entered into preliminary talks with Office Depot in September.

Staples expects to close the deal by the end of the year, pending stringent regulatory review by the Federal Trade Commission (FTC). The agency nixed a proposed Staples-Office Depot melding in 1997, but in greenlighting Office Depot’s merger with OfficeMax in late 2013, acknowledged the changing competitive environment for the office supply channel.

In the interim, Staples said it will remain focused on its ongoing “strategic reinvention,” which includes driving growth in delivery businesses and categories beyond office supplies, while Office Depot will continue its integration of OfficeMax.

In a statement, Office Depot chairman/CEO Roland Smith said, “This transaction delivers great value for our shareholders and creates a company ideally positioned to serve our customers and grow over the long term. It is also an endorsement of our many accomplishments and the tremendous success we’ve had integrating Office Depot and OfficeMax over the past year. We look forward to bringing our experience and knowledge to the new organization.”

The buyout will be funded by Barclays and BofA Merrill Lynch, which are providing a $3 billion ABL credit facility and a $2.75 billion six-year term loan.