Office Depot, OfficeMax Merger: 'It's About Damn Time'

"The synergies will not include higher pricing given the Internet and other pressures, but fewer store locations fighting for sales, lower distribution costs for OMX and ODP, and potential share gains by Staples during the near-term disruption of integrating two disparate systems."

Already, Office Depot is in the process of implementing a three-year plan to cut costs that the company projects will add $300 million to its earnings before interest and taxes. Those expense reductions, and between $480 million to $580 million in merger-related savings, could mean that the merged company could see over $700 million in synergies, according to calculations by Daniel Binder of Jefferies.

"With Office Depot and OfficeMax having closed numerous stores in recent years, plus a potential $1 million to $2 million cash cost to close additional stores, we suspect a lot of the future closing opportunities will come as leases come up for renewal," Binder wrote in a note to clients that forecasts roughly 52% of Office Depot's stores overlap with those of OfficeMax.

Were the merged entity to close or discontinue those stores, Binder calculates Staples could gain up to 30% of those sales, or up to $60 million in revenue annually.

While details of the potential merger, first reported by The Wall Street Journal, haven't been disclosed, Bloomberg reported that a deal is possible this week.

It remains unclear whether OfficeMax or Office Depot would be the acquirer in a potential merger.

Deutsche Bank analyst Mike Baker forecasts that if OfficeMax were the acquirer, it could see a boost to earnings per share of 22 cents. "Although we think the more likely deal is OfficeMax buying Office Depot, if ODP were to buy OMX in an all-stock deal, it would be more accretive," wrote Baker, who calculates a 30 cent EPS boost for Office Depot.

To help pay for the deal, Office Depot may also need to dispose of a joint venture in Mexico.

One twist to a potential deal comes from antitrust authorities such as the Federal Trade Commission and Department of Justice.

In 1997, the FTC's head, William Baer, opposed a merger proposal between Office Depot and Staples, citing the prospect of anti-consumer effects such as rising prices. Baer, who now heads the DoJ's antitrust division, is likely to play a key role in evaluating any proposed merger.