Office Depot to Buy Viking for $2.6 Billion

Hoping to gain a stronger retail presence internationally, Office Depot Inc., the world’s largest seller of office products, said Monday it agreed to buy Torrance-based Viking Office Products Inc. for $2.6 billion in stock.

The one-for-one stock swap deal would give Viking, the world leader in catalog sales of office products, the benefit of Office Depot’s buying power in the United States.

Viking brings to the table an extensive sales network in Europe, which accounts for two-thirds of its $1.3 billion in annual sales. Office Depot, based in Delray Beach, Fla., can use that network as the backbone of its future foreign operation.

The move also furthers the race between Office Depot and rival Staples Inc., the No. 2 office products retailer, to gain a toehold in the direct-marketing business. On April 7, Staples agreed to buy closely held Quill Corp., a direct marketer, for about $685 million in stock.

Staples and Office Depot have been searching for new alliances since a federal judge last June blocked Staples’ $4-billion acquisition of Office Depot, saying it would violate antitrust laws.

Analyst Peter McMullin of Southeast Research Partners noted that by acquiring a catalog-based operation, Office Depot should avoid the antitrust problems that derailed the Staples deal.

“The office products industry is consolidating with three major power players,” said retail analyst James Stoeffel of Salomon Smith Barney, referring to Staples, Office Depot and a strong player that will emerge from the remaining competitors.

Each of the power players, he said, will need to have a significant direct-marketing operation.

Other analysts cited the growing market overseas as a key draw for Office Depot.

Viking shares soared on news of the merger, gaining $5.88 to close at $29.81 on Nasdaq; Office Depot shares fell $3.38 to close at $31.06 on the New York Stock Exchange.

“Office Depot made a strategic purchase, but they paid a lot of money for it,” Stoeffel said.

Based on fiscal 1997 figures, the combined company would have sales of $8 billion and earnings of $229 million.

Under the signed agreement, which needs approvals of the Federal Trade Commission and Securities and Exchange Commission, Viking would become a wholly owned subsidiary of Office Depot.

David Fuente, chairman and chief executive of Office Depot, would be chairman and CEO of the merged company, which would maintain its Florida headquarters and the Office Depot name. Irwin Helford, chairman and CEO of Viking, would continue as chairman of the subsidiary in Torrance and become vice chairman of the combined company.

Each company plans to maintain its existing product lines and service approach, with Viking offering a higher-end, more service-oriented product, compared with Office Depot’s more price-conscious strategy.

The combined firm would have 39,000 employees.

Office Depot said the merger is expected to increase earnings by 1 to 2 cents a share in 1999. One-time costs associated with the merger would be about $107.5 million, Fuente said. But he added that the combined company expects to see $35 million in savings in 1999 from areas such as purchasing, combined warehouse operations and catalog production.

The mood during a teleconference to announce the deal was upbeat, with Fuente and Helford giving one another high marks for leadership. But the news wasn’t all good.

The Pacific Exchange said Monday it had begun an investigation into trading of options to buy Viking. Trading of call options, which investors use to bet that shares will rise, surged late last week, just before Office Depot made its bid.

Bloomberg News was used in compiling this report.