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In a strategic decision to create value for shareholders, Office Depot, Inc. (ODP - Analyst Report) decided to exit its Mexican joint venture with Grupo Gigante, S.A.B. de C.V. by selling its 50% stake to the latter for approximately $690 million. The joint venture, which was formed in 1994, currently operates over 248 stores throughout Mexico and Central America, generating more than $1.1 billion in annual sales.

Office Depot indicated that net after-tax proceeds worth an estimated $550 million would be deployed in redeeming 50% of the convertible preferred shares held by BC Partners and its affiliates. The company also intends to redeem its 6.25% bonds of $150 million due in Aug 2013. We believe the transaction would definitely help improve the liquidity position and augur well for the company’s planned merger with OfficeMax Inc. .

The deal, which is subject to the approval of Mexican regulators and Grupo Gigante shareholders, got the go ahead from OfficeMax.

Office Depot and OfficeMax decided to merge their businesses in order to better compete with the industry bellwether, Staples Inc. (SPLS - Analyst Report) and online rivals such as Inc. (AMZN - Analyst Report). The decision is expected to prove beneficial for both the companies, which have been grappling with soft sales.

The all-stock merger agreement, which involves 2.69 Office Depot shares for each share of OfficeMax, would result in cost synergies of $400 to $600 million yearly by the third year from the time of the closing of the transaction. The transaction is expected to be concluded by the end of 2013.

The office supply retailers are going through a rough patch as decline in business and consumer spending in the wake of the global meltdown has resulted in sluggish demand for big-ticket items such as business machines, furniture and other durable products. Moreover, increased competition from online rivals is taking a toll on their profitability. Amid such a scenario, the decision to merge would help capture a wider market and generate incremental revenues.

Currently, Office Depot carries a Zacks Rank #3 (Hold).

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