Starboard asks Staples to merge with Office Depot

(Reuters) - Activist investor Starboard Value LP called for office-supply chains Staples Inc and Office Depot Inc to merge, saying a combined company would lead to greater savings.

The hedge fund owned 5.1 percent of Staples last month when it boosted its stake in Office Depot to nearly 10 percent.

A merger will result in synergies of at least $2 billion, more than doubling operating profits, Starboard's founder and Chief Executive Jeffrey Smith wrote in a letter to Staples' Chief Executive Ronald Sargent on Tuesday.

"If it becomes clear to us that you have no intention of seriously pursuing this unique and highly attractive opportunity, it would be a clear sign that significant leadership change is needed at Staples," Smith said.

Staples, the No.1 office supplies chain, said it has met Starboard Value to discuss their ideas, and carefully considers all actions that would create shareholder value.

Office Depot said it did not comment on rumors and speculation.

A merger would help fend off intense competition from online retailers such as Amazon.com Inc and big-box chains such as Wal-Mart Stores Inc that sell the same merchandise for less.

Fears of added antitrust scrutiny, however, loom as Staples and Office Depot are the biggest remaining retailers of core office supplies, such as paper and ink toner.

Before a merger, Staples and office Depot will face a long review by the U.S. Federal Trade Commission (FTC), like the ones being faced by Dollar General Corp and Dollar Tree Inc , Michael Keeley, partner at law firm Axinn, Veltrop & Harkrider LLP, told Reuters.

Dollar General and Dollar Tree have bid to buy Family Dollar Stores Inc .

The FTC would either clear or seek to block a Staples-Office Depot deal outright, and not ask them to divest stores, Keeley said.

Regulators nixed Staples' attempt to buy Office Depot in 1997, citing antitrust concerns.

The FTC approved Office Depot's $976 million acquisition of OfficeMax in 2013 without the need to close stores, citing increased competition in the office supply industry.

The magnitude of value created from such a combination would far exceed anything that either company could achieve on a standalone basis, Smith said.

Staples shares were down 2 percent at $17.01.

Office Depot shares were down 1.4 percent at $7.93 on the Nasdaq on Tuesday.

(Editing by Joyjeet Das)

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