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Office Depot Inc. (NYSE:ODP)

February 20, 2013 11:00 am ET

Executives

Michael Steele

Brian Turcotte

Ravichandra K. Saligram - Chief Executive Officer, President and Director

Neil R. Austrian - Chairman and Chief Executive Officer

Bruce H. Besanko - Chief Administrative Officer, Chief Financial Officer and Executive Vice President

Michael D. Newman - Chief Financial Officer, Executive Vice President and Member of Internal Compensation & Benefits Committee

Analysts

Gregory S. Melich - ISI Group Inc., Research Division

Daniel T. Binder - Jefferies & Company, Inc., Research Division

Alan M. Rifkin - Barclays Capital, Research Division

Michael Baker - Deutsche Bank AG, Research Division

David S. Strasser - Janney Montgomery Scott LLC, Research Division

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

Christopher Horvers - JP Morgan Chase & Co, Research Division

Colin McGranahan - Sanford C. Bernstein & Co., LLC., Research Division

Matthew J. Fassler - Goldman Sachs Group Inc., Research Division

Operator

Good morning, my name is Regina, and I will be your conference call facilitator today. At this time, I would like to welcome everyone to the OfficeMax, Office Depot Joint Conference Call. [Operator Instructions]

It is now my pleasure to introduce you to Mike Steele, Vice President of Investor Relations of OfficeMax. Mr. Steele, you may begin your conference.

Michael Steele

Thank you, everyone, for joining us today to discuss the combination of OfficeMax and Office Depot in a merger of equals. This morning, we issued a press release announcing this transaction, and the webcast and slide presentation are available on both www.officedepot.com and www.officemax.com. Each company also issued press releases this morning announcing their fourth quarter and full-year 2012 financial results. However, the purpose of today's call is to discuss the transaction, not our earnings.

On the call with us this morning are Neil Austrian, Chairman and Chief Executive Officer of Office Depot; Ravi Saligram, President and Chief Executive Officer of OfficeMax; Michael Newman, Chief Financial Officer of Office Depot; and Bruce Besanko, Chief Financial Officer of OfficeMax. At the conclusion of the prepared remarks, we will take question and answers as time permits.

Now let me turn the call over to Brian Turcotte, Vice President of Investor Relations of Office Depot.

Brian Turcotte

Thank you, Mike, and good morning. Certain statements made on this call and other written or oral statements made by or on behalf of Office Depot and OfficeMax constitute forward-looking statements within the meaning of the federal securities laws. Management believes that these forward-looking statements are reasonable. However, the company cannot guarantee that actual results will be consistent with the forward-looking statements. You should not place undue reliance on them. These statements are based on current expectations and speak only as of the date they are made. The company undertakes no obligation to publicly update or revise any forward-looking statements. Important factors which may cause results to differ from expectations are included in both parties' annual report on Form 10-K and other filings with the SEC. With that, I'd like to turn the call over to Ravi Saligram. Ravi?

Ravichandra K. Saligram

Thank you so much, Brian. Good morning, everybody. A very good morning to all of you. Thank you so much, for coming in short notice. A quote Neil made some time ago has struck indelibly in my mind, and I quote him. He said, "It takes two to tango." Now those of you who met me in person know that tailors measure me just for the sake of exercise and dancing is not my forte. And notwithstanding this, I joined Fred Astaire dance school, and lo and behold, Neil and I have decided to tango. All joking aside, ladies and gentlemen, Neil and I, and our Board of Directors are absolutely delighted to announce a historic event. Two Fortune 500 companies in office product services and solutions, coming together in a true merger of equals to form a strong global enterprise that will transform the industry. This is a huge win for shareholders and a huge win for our customers. Neil?

Neil R. Austrian

Thanks, Ravi. I'd first say that from the time we started talking, Ravi and I have grown very fond of each other. It's very clear that we can work very well together. And on behalf of our Board and all of our associates, I want to thank Ravi and his team for all the hard work in getting to the point we are today.

First, I want to clear up a couple of things. Our webcast provider inadvertently released our Q4 earnings press release this morning, well in advance of schedule. In that, we mentioned the definitive agreement with OfficeMax in the release, which caused the confusion this morning. And we regret any inconvenience this may have caused. And secondly, a number of online publications stated erroneously this morning that Office Depot was acquiring OfficeMax. That is not the case. Let me make it perfectly clear: this is a merger of equals. It's been a merger of equals since Ravi and I began discussing why this combination makes great sense.

Let me turn the call over to Ravi.

Ravichandra K. Saligram

Neil, thank you so much. And the reason we have been so particular about the merger of equals is because it's a great win for our shareholders and for our customers. And to all our associates, both at OfficeMax and Depot, any misperceptions that got created, our apologies, because we want to strive to get the best of the best to take us forward. This combination will create a stronger, more global efficient competitor, able to meet the growing challenges of a rapidly changing industry. We're confident that this combination will afford us the opportunity to better serve our customers around the world. By bringing OfficeMax and Office Depot together, our customers will benefit from innovative products, services and solutions available through a global multichannel network.

Neil R. Austrian

Importantly, the combined company will have a strong balance sheet and solid foundation from which to beguiled long-term value for our shareholders. The combined company will be positioned for sustainable, long-term value creation, including anticipated annual synergies of between $400 million to $600 million. We'll dive further into the financial benefits of this combination shortly.

If you turn to the next slide, we'll walk through the key terms of the transaction.

This merger of OfficeMax and Office Depot is a merger of equals. Under the terms of the agreement, which is structured to be tax-free to the stockholders of both companies, OfficeMax shareholders will receive 2.69 Office Depot shares for each share of OfficeMax common stock. The pro forma ownership of the new company will be approximately 54% Office Depot and 46% OfficeMax.

As noted in our press release this morning, Office Depot's largest shareholder, BC Partners, has agreed to vote in favor of the transaction.

Ravichandra K. Saligram

Now following the closing, the combined companies' newly constituted Board of Directors would include equal representation from each of the 2 companies. Neil and I will remain in our current positions through the completion of a search process for naming the CEO for the combined company. The process will be overseen by a selection committee made up of an equal number of independent Board members from each company. Both Neil and I, as well as external candidates, will be considered in the search process. The combined company's management team will draw upon the experienced group of leaders from both companies.

Please note that OfficeMax has the ability to declare a special dividend of up to $131 million or $1.50 per OfficeMax share, which would not affect the exchange ratio. Once the management structure of the combined company has been set, the team will make final determinations with regard to the go-forward brand and headquarters location. The transaction is expected to be completed by the end of 2013 and is subject to stockholder approval by both companies, as well as the receipt of regulatory approval and other customary closing conditions.

Neil R. Austrian

It's clear that Office Depot and OfficeMax are a compelling strategic fit, and we're very excited about the numerous and highly compelling strategic benefits that this will bring to all of our key stakeholders. The 2 companies have complementary structures, cultures and capabilities. Together, we'll create a stronger, more efficient provider of office solutions with pro forma 2012 combined annual revenues of approximately $12 billion.

Ravichandra K. Saligram

$18 billion.

Neil R. Austrian

Wait -- $18 billion, excuse me. We expect the combined company to generate enhanced financial performance. Specifically, there are significant synergy opportunities in the combination, which will lead to increased financial strength and flexibility. Given the size and scale of the combined company, we will establish a more attractive cost structure across our channels as part of becoming a more competitive player in a rapidly changing industry.

Ravichandra K. Saligram

Post-closing, by implementing best practices in sales, operations and management, and leveraging the talented associates across both companies with deep industry knowledge, we will be well-positioned to optimize our shared multichannel sales platform and distribution network, primarily in North America. Together, we will provide enhanced services to our customers, which in turn build a strong brand loyalty essential to driving sales growth. As we said before, consumers and business-to-business customers are increasingly demanding a seamless omni-channel experience across retail stores, direct sales, telesales and digital environments. By integrating these touch points effectively, we expect to build lasting brand loyalty and growth. Finally, we will benefit from accelerated innovation, driven by sharing customer insights and learnings from innovative pilot programs underway to better identify and fulfill evolving customer needs.

These are all tremendous benefits for our investors, customers, associates and other key stakeholders.

Neil R. Austrian

Looking closely at the financial benefits of this transaction, the pro forma combined North American cost base is approximately $14 billion. This merger is expected to capture between $400 million to $600 million in annual cost synergies through purchasing efficiencies, supply chain, advertising, headcount reduction and other G&A. On a pro forma basis, as of December 29, 2012, the combined company would've had more than $1 billion in cash on hand and more than $1 billion available through revolving credit facilities, giving it the flexibility to invest in both its current business and future growth opportunities. We expect between $350 million and $450 million of one-time costs to achieve, along with transaction expenses, and also expect capital investment of approximately $200 million. Due to the highly complementary nature of the 2 companies' overseas business, we do not expect significant synergies on the international level.

The combination of these businesses, however, will strengthen the combined companies' ability to serve customers around the world.

Ravichandra K. Saligram

This is the right opportunity at the right time and one that provides us the scale to better compete in the rapidly changing office products industry. By combining our resources, OfficeMax and Office Depot will be well-positioned to optimize our shared multichannel sales platform and distribution network, which will be primarily in North America.

Additionally, by leveraging best practices and scale, operations and management will be positioned to better compete with many online retailers, mass merchants, wholesalers and other traditional retailers that are placing a greater emphasis on office products and services.

Going forward, the combined company will be positioned to continue building its business by making the investments necessary to grow e-commerce platforms and enhance its systems. We believe this will result in a seamless experience to customers across all channels.

Neil R. Austrian

Here, you can see the enhanced global footprint of the combined company. Together, we will have the global breadth to serve customers wherever they work. With our broader global reach, we'll be able to provide a wide array of services and solutions that enable customers to work more efficiently and productively in more places around the world.

Both OfficeMax and Office Depot -- it's you Ravi.

Ravichandra K. Saligram

Oh, sorry -- both OfficeMax and Office Depot have built their strong reputations by delivering an outstanding customer experience, and together our commitment to excellence will only be strengthened. Office Depot and OfficeMax customers around the globe will benefit from the combined companies' innovative offerings. The combined company will remain intensely focused on providing customers with the highest levels of service. By capitalizing on its size and scale, the combined company will be able to expand its capabilities to better service customers and provide a wide array of products, services and solutions.

By meeting the growing demands for a seamless omni-channel experience across retail stores, direct sales, telesales and digital environments, by bringing customers innovative solutions for today's workplace, the combined company expects to build strong and lasting brand loyalty.

Neil R. Austrian

By sharing our customer insights and experiences, as well as learnings from innovative pilot programs currently underway, we'll be better able to identify and fulfill evolving customer needs. The complementary capabilities of this combination will allow the combined company to provide customers with better solutions faster and more efficiently.

In summary, we're excited about the opportunities this combination generates for the stakeholders of both Office Depot and OfficeMax. This merger is a true win-win for our businesses, our shareholders, our customers and our employees. By combining our 2 businesses, we create a stronger, more efficient competitor, able to meet the growing challenges of a rapidly changing industry. Our customers and associates will benefit from our ability to deliver innovative products, services and solutions through a global multichannel network.

Ravichandra K. Saligram

Clearly, the synergies are a key part of the strategic rationale for this transaction. The combined company will have increased financial strengths and is ideally positioned for sustainable long-term value creation, including anticipated annual synergies of $400 million to $600 million. But synergies are only the starting point. Both our companies have been working to get through the changes that have occurred through the recession. What this provides us is an important platform, an important foundation, to fundamentally transform the 2 companies on a combined basis.

Now importantly, until the merger is completed, which is expected to occur by the end of the calendar year 2013, OfficeMax and Office Depot will continue to operate as independent companies competing with each other. The merger is conditioned upon, among other things, the approval of both company shareholders, the receipt of regulatory approvals and other customary closing conditions.

This is an exciting day for both of our companies and all our stakeholders. We are confident that by implementing the best practices of both of these innovative companies, we will deliver tremendous long-term growth and value for Office Depot and OfficeMax shareholders. Today, we have created a true MOE, a true win-win for our shareholders, customers and associates, onwards and upwards.

With that, we'd like to open the call for any questions.

Question-and-Answer Session

Operator

[Operator Instructions] Our first question will come from the line of Greg Melich with ISI Group.

Gregory S. Melich - ISI Group Inc., Research Division

I want to follow up on the synergies, the $400 million to $600 million. Could you help us understand a little bit more as to which -- what would be in retail, what would be in contracts and what sort of revenue you would expect, if any, out of the deal in terms of synergies?

Bruce H. Besanko

Greg, this is Bruce Besanko. As both Neil and Ravi pointed out, the synergies is $400 million to $600 million on an annual basis. We expect to get that on a cost basis of about $14 billion, as Neil had indicated. We're going to get that from a variety of sources. Purchasing COGS, synergies will be one, supply chain, advertising and then of course, there will be some headcount reduction and other G&A. As Neil and Ravi also indicated, there's going to be one-time costs, about $350 million to $400 million, and capital investment of probably in the order of approximately $200 million. So that's what we know today and we think that the synergies are a big part of the reason for this deal.

Gregory S. Melich - ISI Group Inc., Research Division

Is -- of that $350 million to $450 million, how much would be cash?

Michael D. Newman

Most of it.

Neil R. Austrian

Most of it.

Bruce H. Besanko

Go ahead.

Gregory S. Melich - ISI Group Inc., Research Division

The cash cost?

Michael D. Newman

Yes. Mike Newman. Most of it. And I'd add, we're not to try to build out segment details of restructuring and individual restructuring dollar amounts by bucket. We've spent a fair amount of time on this as teams. We've worked up these estimates as teams. We feel both sides agree. And at this point in time, that's the level of detail we'll provide.

Gregory S. Melich - ISI Group Inc., Research Division

Great. And just lastly, just to be clear, the $200 million of CapEx, is that incremental to what the companies would've been spending separately on their own?

Michael D. Newman

It's a good question. For what we think we need to execute the synergies, yes. Now we have not spent enough time to understand if there might be some CapEx offsets. That work needs to be done.

Bruce H. Besanko

Exactly. There may be some overlap, we just haven't gone to that detail yet.

Operator

Your next question will come from the line of Dan Binder with Jefferies & Company.

Daniel T. Binder - Jefferies & Company, Inc., Research Division

My questions were around capacity. Any early thoughts on what the store portfolio might look like 1 year, in 2 years, 3 years after the proposed merger?

Neil R. Austrian

This is Neil. There are certain things you can talk about and certain things you can't talk about as competitors. And I think, well, Mike and Bruce led some very detailed synergy and one-time cost discussions. The retail store was off the table at this point in time. I think you could expect to see a retail strategy evolve once the merger is approved. I think to do anything prior to that would probably not make a lot of sense at this point in time.

Daniel T. Binder - Jefferies & Company, Inc., Research Division

And then I was wondering if you could also comment on your Office Depot's $300 million initiative, if -- what, if any is being incorporated into this $400 million to $600 million?

Michael D. Newman

Well, our initiative stands alone at this point in time and we're not going to -- as we talked about, we're going to operate these companies as separate companies. As we go forward, we're going to continue to look at downsizes. The only thing I would add to that what Neil said was as we give you the range of synergies, we've not included anything in that synergy range for real estate.

Daniel T. Binder - Jefferies & Company, Inc., Research Division

So just to be clear, the $300 million initiatives would be incremental to this?

Michael D. Newman

Yes.

Daniel T. Binder - Jefferies & Company, Inc., Research Division

And to that -- on that point, as you outlined those synergies today, we also saw your fourth quarter slide presentation, which showed the initiatives for this year being offset largely by sales deleveraging. So I'm just curious as you look out over 3 years, how much of that $400 million to $600 million do you think you can actually flow through to the bottom line?

Michael D. Newman

Yes. I think for this call, to keep the focus on what this transaction, which you can tell, we're all very excited about, we're going to defer questions on earnings until we can get a chance to talk with you investors separately.

Daniel T. Binder - Jefferies & Company, Inc., Research Division

Okay. But if you speak specifically just to the $400 million to $600 million, over 3 years, that's the growth synergy, what portion out do you think can float at the bottom line?

Bruce H. Besanko

Well, I think -- Dan, this is Bruce. I think what we need to do is to take a look at the $400 million to $600 million. We think that there may be investment back to customers that may be part of that, but that's work to be done.

Operator

Your next question will come from the line of Alan Rifkin with Barclays.

Alan M. Rifkin - Barclays Capital, Research Division

One would have to assume that given the history of M&A activity in this sector, that you folks, prior to today, ran this by the FTC. I was wondering if you could maybe give us any insights at all as to what store closures may be mandated by them? That's my first question.

Ravichandra K. Saligram

Alan, we both sought advice on the regulatory process. We're confident that the market has changed sufficiently rapidly that we have a very strong case here. And that's about all that I'd like to comment on.

Alan M. Rifkin - Barclays Capital, Research Division

Okay. Ravi, you said that the synergies will be $400 million to $600 million by the end of the third year following the close of the merger. So we're talking about the end of 2016. Would you be able to give numbers as to what that might look like, 1 and 2 years after the merger, so that we can monitor the progress of the synergies realized?

Bruce H. Besanko

Yes, so obviously, this depends on a lot of factors. But we're thinking that the first year could be anywhere from around 1/3 of the synergies by year 2, maybe on the order of 75% or 80%, and then have a full run rate by the end of the third year. But those numbers are very, very rough estimates and there needs to be a lot of vetting done.

Ravichandra K. Saligram

So Alan, you have to understand, we're independent companies and competitors. We've done all of this at a high level. Given the similarities between the companies and their state, there is no doubt that there are synergies, and I think every one of you has written about it. I think this validates that it's there and it validates that significant -- both our companies, when combined, our P&L profile will be significantly enhanced and we'll become a stronger competitor. I think that's the big picture at this point that we want to emphasize versus the details because we've got a lot of work to do once we combine. At this stage, I think, we can only give you a high-level view.

Neil R. Austrian

And I think, as Mike had said, none of this involves the retail stores in terms of what may or may not happen.

Alan M. Rifkin - Barclays Capital, Research Division

Okay. And one last question, if I may. With no significant synergies on the international front for obvious reasons, can you maybe just give us a little bit color on how the combined entity is looking at the future of international operations? I mean, are you still as committed to that?

Ravichandra K. Saligram

So I'll give a quick view and then Neil can add some perspective. So look, I think what is terrific is that they're complementary geographic footprints. We have strong operations in Australia and New Zealand. We have strong operations in Canada. We both have operations in Mexico. Clearly, Office Depot has operations in Europe. So we truly create a global enterprise here and we think that is going to be a significant competitive advantage. So at this time, that's the premise of this. So while there may not be cost synergies, the fact that we can have a global footprint, I think, serve -- will help serve our customers in a very good manner.

Neil R. Austrian

I think the only thing I'd add is until this last year, on an economic situation at Office Depot, we never saw both Europe and the U.S. in a recession at exactly the same time. And depending on the years, one would pick the other up. I think we still believe that the combined international business is going to be a very strong and very strategic part of this combined company.

Operator

Your next question will come from the line of Mike Baker with Deutsche Bank.

Michael Baker - Deutsche Bank AG, Research Division

I -- my questions on the BC Partners part of this. And can you just help us with the math on what -- how their stake will convert to common share? And also what I'm getting at is what we think the ultimate share count will be for the combined company? I mean, I suppose you use [ph] Office Depot's turned in roughly 89 shares outstanding x that 2.69 x OfficeMax's shares, but then there's some adjustment I suppose for BC Partners. Can you just walk us through that?

Neil R. Austrian

This is Neil. Let me try and then I'll turn it over to Mike. If BC Partners were to redeem in full, the ownership is 54% for Office Depot shareholders, 46% for the OfficeMax shareholders. If BC Partners converts half of their preferred into common and then they basically just keep 5%, which they've indicated they might want to do, Office Depot would have 51% OfficeMax shareholders 44% and the BC Partners would have 5%. So those are the kind of 2 bookends at the end of the deal in terms of how the ownership would break out.

Michael D. Newman

We calculate a total share count of about 579 with -- about round numbers, 291 for us, about 248 for Max on a converted basis. And then if BC converts the remaining non-redeemed shares into common, you've got another 41 [indiscernible].

Michael Baker - Deutsche Bank AG, Research Division

Okay. That's helpful. One more while I'm at it. Just going back to the FTC issue, what do you think -- how do you think they'll look at it differently now than they did in 1997 when they tried to be a merger in this industry? And I think we all have our thoughts on what's different, but I wonder if you could articulate what you guys think is different versus then?

Ravichandra K. Saligram

So look, the -- today compared to the last decade or so, this industry has completely changed. And from a brick-and-mortar retail business in office supply stores, first, each of the competitors has been evolving their product lines into products, into services and solutions, which means a very broad range of competitors. So today, we compete even in just the retail front, with mass merchants. We compare with the -- compete with the Targets, the Walmarts, the Costcos, the Best Buys, et cetera. And secondly, from supplies, it's now technology is a big part of our businesses, and service and solutions is a big evolution for both our companies. Print solutions is becoming very big. And then the very important transformation thing has been the advent of the Internet. I think Amazon in 1997, if my memory serves me correctly, might not have even been a $150 million company or it was just very embryonic. Today, I don't need to tout about them, but they're a dominant force in trying to sell -- they're very much in the space. And so you've got -- it's truly become from a brick-and-mortar world, we've gone into the evolution of a truly multichannel world. So you've got telesales, you've got -- and the competitors are different because you've got wholesalers on one side, you've got the Internet, you've got mass merchants. So it is totally, totally different landscape and so -- and each of the formats of the competitors, even in the superstores, have changed versus '97 when they were all very identical. At that time, people thought of these as category killers. That's completely changed. So I think we have a very strong argument and case here.

Neil R. Austrian

Yes. I mean, Ravi is right on. The Internet changed everything and I think all you had to do in '97 was walk in a Walmart and they may have had 100 to 200 square feet of office supplies, and today, they've got thousands of square feet of office supplies. A customer has total flexibility in terms of where they can or can't buy office supplies. And if you don't want to go to brick-and-mortar, it's on your doorstep the next day.

Ravichandra K. Saligram

And it's really -- the big thing to note here is it's not just a supplies business now. It's really products, services and solutions and what we think from this is, the combination will create tremendous value for customers. That is the important thing.

Operator

Your next question will come from the line of David Strasser with Janney.

David S. Strasser - Janney Montgomery Scott LLC, Research Division

When you guys step back and look at the history of mergers, and particularly the retail side, but in general. Is there a playbook out there that you can look to help guide you through this? I mean the history isn't that successful of 2 different cultures. Two retailer -- competitive retailers come together to try and create that incremental value. I mean the synergy you talk about, and you go through the model, there's obviously a pretty powerful opportunity, no doubt. But, I mean, are you looking at pitfalls of some other deals and so on?

Ravichandra K. Saligram

So let me take a shot, and I think Neil should give his views, too. I have a lot of deals in my career throughout the world. And ultimately, I would believe that companies don't merge, people come together. And a lot of mergers fail because of cultural issues, chemistry issues and wrong vision. Here, what's really been for us a very heartening thing, is as we met together for management presentations and our teams started doing the synergy work, was -- the chemistry between the teams, but also that we were doing many similar initiatives. So it didn't take us long to understand what each other was doing. So I think one of the important things is, a, speed. We'll be able to hit the decks running. B, I think the chemistry is good here. And so -- and we have Neil and his team, we admire what they have done with the small store format. I think on our side, Jim Barr and his team have done a tremendous job on the digital side. I can just list a lot of things where we can complement each other. On Neil's side, I think -- we think they've got a great SFA system. So when we've looked at this, the complementarity of skill sets, platforms and people, that I think is going to be key. But clearly, you need to be -- it's an interesting time period because we're -- we'll continue to compete vigorously and we'll have to find the appropriate time, the right planning mechanisms to ensure a smooth merger. Neil?

Neil R. Austrian

Now I think you and I have talked about this endlessly, and it is people that are going to make it work. It is the culture. You and I have the same kinds of visions, the same thoughts we have that this has to be a transformative event, not just putting 2 office supply companies together. I think the other key to answer that question, we're almost in the identical business. We've got the same customers, we've got basically the same vendors and we know each other's business very well. And it's not a fashion-related kind of retail business where you're dependent on the buyer to a great extent. And I think an awful lot has been thought about over the years in terms of doing this kind of a merger of equals, so I think while the planning may not have been on paper, I think it's been in the back of all of our minds for a long time.

Ravichandra K. Saligram

And the interesting thing are when we started looking at synergies, each side independently had some numbers, and Mike and Bruce can attest to that. As we started looking at a high level together, it was very interesting to see the conclusions being reached and so I am very positive about the future. And look, ultimately, I'll say one more thing. When Neil and I met the first time, it was a bit awkward as it is when you are 2 competitors. But the leaders set the tone. And I think our associates, both sides, should take great comfort that both of us -- it's not about us. Which is why when you look at how we've structured all of this, it's not about us, it's about our people, it's about our customers, it's about our shareholders. And therefore, this is going to be a big win.

David S. Strasser - Janney Montgomery Scott LLC, Research Division

That's actually very helpful. And just one more on a different topic. Just Mexico. You talked about the footprint. There is very little overlap around the country. And I may be a little naïve in understanding exactly how the market works in Mexico, but can you just kind of talk -- that, I know, that's one market where you both have a pretty good business. Can that complement each other? I know there's some commentary last week about potentially selling the Mexican operations. But does that business, not having seen it, does that complement each other?

Ravichandra K. Saligram

So look, at this -- we'll have to go through regulatory approvals in Mexico, like in other places. So our view is, right now, we are not anticipating any changes with respect to our relationships with each of us are partners, excellent partners. And so to me, right now, we operate as independent companies and when the time comes for integrating the business, we will sort out those details as appropriate.

Neil R. Austrian

I mean, we've got 7 to 9 months of waiting for regulatory approval and we want to do this with a lot of thought and a lot of common sense in terms of how to go forward. So I think it's really premature because we haven't spent any time really thinking about this, quite honestly because almost 100% of the synergies are in North America.

Ravichandra K. Saligram

And we don't want to be second-guessing any regulatory processes at this stage.

Operator

Your next question will come from the line of Brad Thomas with KeyBanc Capital Markets.

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

Just to follow up on that last question about Mexico, I know as recently as last week, there were stories about Office Depot potentially looking to sell its stake in the Mexico business. Obviously, Ravi, Bruce, you've talked about the Croxley business being up for sale. Are those kind of strategic initiatives on hold now while we wait for a merger of the 2 companies?

Neil R. Austrian

Mexico, at this point, we're not doing anything. As I think I just said with Ravi, we need to really evaluate that whole situation. So at this point in time, we are not planning to sell anything at this point in -- within our portfolio.

Ravichandra K. Saligram

And the same holds true for Mexico. We've got -- Mexico's core to both of us and very important for both of our companies. We've got outstanding partners, it's business as usual and we'll see at the appropriate time what's the right decision. As far as Croxley is concerned, we started that process some time ago. That will continue to see whether we can -- if disposing it provides good value for our shareholders. And if we can't, we have a very good business in Croxley, which produces good financial returns. So we'll just, at the appropriate time, make the decision.

Bradley B. Thomas - KeyBanc Capital Markets Inc., Research Division

Great. I appreciate the clarification. And then just a follow up with respect to the timeline. So when we think about the Board selection and the interview process for the new management team, I mean do we have to wait until the deal actually passes regulatory approval and closes before a new CEO can be selected? How does the timeline work?

Ravichandra K. Saligram

Well, we're planning to close -- our target is the end of the calendar year. And so appropriate decisions will be made close to that, before or after. The important thing for our Boards, they have immense confidence that they've got 2 CEOs running each of their companies independently and with good leadership, I might add, for all our associates should take great comfort and our -- we have great confidence that our Boards will make the right decision and the appropriate decision at the right time for the combined company. The whole premise on this thing, Neil and I, we didn't get our egos in front of us. Our whole premise was, what is right for shareholders. Because if we had -- look, this thing has been talked about for 20 years and it required a great amount of fortitude on both our sides to swallow our egos and say, "Look, it's not about us. It's about our people. It's about our customers. It's about our shareholders." Which is why I think we've got to the place we have. And so we have great confidence that our Boards will make the right decision on the combined company, but Neil and I will plan to continue to lead our companies as we have.

Neil R. Austrian

I think the only comment I'd make, it would be very premature to select the CEO in the next month or 2 until we really understand what the FTC is going to do. Because we are competitors, as Ravi said at the beginning. And in the unlikely and very unlikely event that we wouldn't get approval, the last thing we want to do is do anything so that each company couldn't succeed if they had to on their own.

Ravichandra K. Saligram

So this, we have taken lessons from the past. And the most important thing is do no harm, protect our franchises. And as we protect our franchises, build for the future. So I think our Boards have taken a very prudent decision on this issue and I have every confidence that the right and appropriate decision will be made in the fullness of time.

Operator

Your next question will come from the line of Chris Horvers with JP Morgan.

Christopher Horvers - JP Morgan Chase & Co, Research Division

How many -- it's public information out there and I know you haven't really flushed out your -- the store closure strategy. But how many MSAs or cities are Office Depot and OfficeMax the only 2 major office stores? And how many markets do you think that is overall and what sort of store numbers?

Ravichandra K. Saligram

We have no comment on this issue.

Neil R. Austrian

Chris, we're not going to talk about that at all.

Christopher Horvers - JP Morgan Chase & Co, Research Division

Okay. Fair enough. Well then maybe, Mike and Bruce, as you think about, in your own experience in the past -- as you think about your own experience in the past 2 years independently, what's sort of the breakeven sales retention level? If I have a store, 2 stores in the same market, what level of sales do I need to retain after I close one of the stores?

Michael D. Newman

Chris, we're not going to get into that because we answer 1 question, and then we answer 5. So we're going to just stay away from that for all the reasons that Neil and Ravi articulated.

Christopher Horvers - JP Morgan Chase & Co, Research Division

Okay. Is there any termination fee if this deal doesn't get approved?

Ravichandra K. Saligram

Yes, that will all be disclosed in the proxy.

Christopher Horvers - JP Morgan Chase & Co, Research Division

Is there any question that I can ask that you're going to provide an answer to?

Neil R. Austrian

Wait. Let me just say, to answer your question, when you say approved, if it's turned down by regulatory authorities, there is no termination fee.

Ravichandra K. Saligram

Good clarification, Neil.

Christopher Horvers - JP Morgan Chase & Co, Research Division

Okay. And then on the BC preferred to equity conversion, you mentioned in the press release the possibility of buying some of that stock back. What are the restrictions in terms of how much you could actually buy back from BC in terms of -- can you provide any details in terms of the timing of when that happens? Does BC do it after you receive regulatory approval or is it at closing and so forth?

Neil R. Austrian

BC has agreed that they will keep the entire preferred until after the shareholder vote. And they're going to vote for the merger, obviously, because they think it's in the best interest of all shareholders. After the vote, the company has the right, should we so choose, to redeem some or all of their preferred stock at any point in time between the shareholder vote in closing.

Christopher Horvers - JP Morgan Chase & Co, Research Division

Okay. And then, and how much could you --

Neil R. Austrian

Basically, the merger agreement, which will be published, requires us to buy half of their preferred after the shareholder vote. The remaining half of their preferred which would convert into approximately 40 million common shares, we can offer to buy or they can convert.

Christopher Horvers - JP Morgan Chase & Co, Research Division

And you could -- and that would fall within your debt covenants?

Neil R. Austrian

We're -- I think we'll be fine. We may need a waiver, but we don't think if we have to get a waiver that it would be anything that we couldn't deal with.

Michael D. Newman

We need a waiver to take the first 40 million shares out. We need a waiver to get that, and we'll be starting that process today.

Christopher Horvers - JP Morgan Chase & Co, Research Division

And then you would need a waiver for the second portion as well, too?

Michael D. Newman

Yes. We're not going to disclose what we're going to do, but we recognize that as well, yes.

Neil R. Austrian

And the thinking behind this, quite honestly, is it's the best interest of all the common shareholders to redeem some of the BC preferred because, basically, it prevents the dilution of their preferred converting into common and it gives more ownership of the future synergies to the current shareholders of OfficeMax and Office Depot.

Ravichandra K. Saligram

And I think, Neil, all the details are...

Neil R. Austrian

They're in the merger agreement and people can read it.

Christopher Horvers - JP Morgan Chase & Co, Research Division

Okay. And then one last one. How do we think about -- or let me say it this way. Do you think a 30% incremental margin is the right number for the retail business?

Ravichandra K. Saligram

No comment on that.

Operator

Your next question will come from the line of Colin McGranahan with Bernstein.

Colin McGranahan - Sanford C. Bernstein & Co., LLC., Research Division

Congratulations as well to a deal long, long, long waited for. Just can -- if you could maybe rough out the calendar a little bit more. I think you said you expected the various regulatory approvals in the next 7 to 9 months. When is the shareholder vote? And did I understand that the decision around the CEO and corporate headquarters would probably follow regulatory approval?

Ravichandra K. Saligram

We have not made any specific comments. During the appropriate time, our Boards will make the right decision. But suffice to say, either just before or after the closing, the new CEO will be appointed. I think Neil was quite lucid and talked about how -- why it's important right now. We're independent companies. We've got to go through a lot of processes: shareholder vote, regulatory approvals, closing conditions. So at this point, the 2 companies have capable CEOs running the companies. At the right time, our Board will make the right decision about who will run the future of the company -- sorry, the combined company.

Neil R. Austrian

I think, Colin, what Ravi said at the very beginning in his remarks is the expectation is that we would get -- we would anticipate getting regulatory approval prior to year-end 2013.

Ravichandra K. Saligram

That's right. Good.

Michael D. Newman

We'd anticipate a shareholder meeting some time in June.

Neil R. Austrian

We haven't even announced it.

Ravichandra K. Saligram

I think, at this point, we don't have any -- I think we have to work all of that out. [indiscernible] We just finished this transaction just a couple of hours ago, so we have to work some of those details out.

Colin McGranahan - Sanford C. Bernstein & Co., LLC., Research Division

I understand. And it's -- we appreciate all the insight. I know it's a lot of in-process stuff. But clearly, I understand the rationale to keep 2 CEOs and to make the decision afterwards. Obviously, one side effect of that is there's certain uncertainty around the corporate headquarters, where it'll be located. That might have some impact on your current employees and how they're thinking about that. So what do you have in place to make sure that you're keeping current Office Depot and OfficeMax employees engaged through this period -- this interim period?

Michael D. Newman

Yes, include -- this is Mike. Included in the costs to deliver the synergies, we've taken the appropriate steps with some retention features that we think we'll cover on both sides retaining our best employees.

Ravichandra K. Saligram

I think, so Colin, you bring up a outstanding point. This is a people business, and on both sides, the thousands of associates across both companies. Clearly, every associate's going to wonder, what's in it for me? And I think what I'd like to say on both -- on behalf of Neil and me, is that this spells opportunity for the future. Yes, synergies are a factor here, but look, the best of this best will be selected. This is a -- that's why we were insistent, both Neil and I, that this is a true merger of equals because we want it to be. We want to get the best from both sides. And that flows through every part of this transaction, whether it is equal number of Board members, all the way through how we look at it. But we are very concerned about our employees because, look, the synergies are going to come from people. They're -- on our piece of paper, that's all fine, but ultimately, you will need your best people to deliver it. Neil and I are very concerned about this. We have taken the appropriate tools and measures. And it's not just about retention plans in terms of just monetary awards, but we're planning to intensively communicate. And I think the future opportunity, because they've had to struggle through the recession, it's really been fighting for survival. Now, they have the opportunity to be transformational, to create a legacy of a very powerful Fortune 500 company just starting out as $18 billion. Just imagine the opportunities. That's what we're going to build on.

Operator

Our final question will come from the line of Matthew Fassler with Goldman Sachs.

Matthew J. Fassler - Goldman Sachs Group Inc., Research Division

A few technical ones. I know you're not going to address the issue of store closings. But just to clarify, the cash, or rather the one-time expenditures, both the costs associated with the deal, should we assume that those do not affect -- do not reflect rather, any costs associated with closing stores?

Bruce H. Besanko

Matt, this is Bruce. That's correct.

Matthew J. Fassler - Goldman Sachs Group Inc., Research Division

Okay. That's helpful. Secondly, I know you have the ability to pay the special dividend up to about $50 a share. What will determine whether you pay a special dividend and how much that dividend will be?

Ravichandra K. Saligram

So let me just chat about that. Bruce and I are in constant touch with our shareholders. When we launched our strategy, we had made an explicit emphasis on turning around the operational turnaround as well as innovative and disruptive moves. Implicit was some of our balance sheet perceptions. As we heard from our shareholders, there's a great -- there were some concerns that we were not so explicit. So we made it a point to be very explicit about making that the middle pillar of our long-term strategy, to really get the right perception of our balance sheet, simplify it and optimize it. And we've taken a number of steps. I think starting with reinstating the regular dividend and the pension buyout, the Lehman Brothers note. And one of the key things was monetizing non-core assets, and Boise was one of them. We worked very hard and we still have preserved the B shares and I think sent out a separate release. So it was very important for us, but as we did this, that we retained the flexibility and the ability to have -- the ability to have a special dividend up to 131 million at the appropriate time. This is something we have been very focused on this transaction. We just completed the Boise. And at the appropriate time, we very much plan to address this because returning value to our shareholders is paramount on our minds.

Neil R. Austrian

And I'd just add that we're very pleased with the work we've done on the balance sheet. We think it's been -- our review has been comprehensive, and as Ravi had indicated, we made great progress in terms of the dividend back in the fall. The resolution of the Lehman matter, the disposition of the pension obligation and then finally, the disposition of the Boise investments. So we're very pleased with the work we've done. We hope our shareholders are pleased and we'll have, as Ravi said, we've been -- we've frankly been focused on this transaction and so, we'll make all appropriate considerations on the Boise cash.

Ravichandra K. Saligram

So I think we would like to wrap on that. I think, look, I just want to say this is amazing that we are here. And many of you, I think, have been reticent in the past to speak about this publicly because I felt that this is not the sort of the thing you talk about. Action always speaks louder than words and I think our teams, Neil's team and my team, and our advisers, have really done an incredible job of helping us create this very powerful global engine, which is poised to transform this industry in the future. Thank you very much.

Neil R. Austrian

I just want to say thanks to Ravi and his team. It's taken us a long while to get here and I think in the time that it's taken, it's been extremely productive because it's allowed us to really get to know each other a lot better and to realize we really do share the same values and same vision, which is going to make getting the synergies and putting this company on the right footing a whole lot easier than if that wasn't the case.

Ravichandra K. Saligram

Thank you very much, folks. Onwards and upwards.

Operator

Ladies and gentlemen, this does conclude today's conference call. Thank you all for joining and you may now disconnect.

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Source: Office Depot, Inc., OfficeMax Incorporated - M&A Call
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