Dive Brief:

• Federal Trade Commission attorney Tara Reinhart Monday argued in U.S. district court in Washington D.C. that Staples' proposed $6.3 billion merger with rival Office Depot doesn’t pass muster because between them, the two retailers sell 79% of office supplies to Fortune 100 companies in the U.S., according to Reuters.

• Staples attorney Diane Sullivan countered that, considering Amazon’s announcement last year that it is entering the space, Staples and Office Depot must combine their efforts or continue as “penguins on a melting iceberg” and that similar competition from web sales are challenging retailers to the point of bankruptcy.

• If the FTC can show that businesses could be hurt by the Staples/Office Depot merger, the court could grant a preliminary injunction that would slow the approval process significantly and allow the FTC to hold hearings in its internal court. But district court Judge Emmet Sullivan called it "troubling" that a preliminary injunction could stymie the deal without a court hearing. "In reality, investors aren't going to wait around," he said, Reuters reports.

Dive Insight:

These court proceedings are expected to take about two weeks, according to Reuters, during which time the FTC aims to show that businesses would be hurt by ending the competition between Staples and Office Depot if their merger goes through.

While the proposed merger of Staples and Office Depot has already garnered regulatory approval from Australia, New Zealand, and China, and the European Union, the FTC is armed with evidence opposing the move, including corporate emails viewed by Reuters expressing concern that businesses would face higher prices if the retailers merge.

Staples last week released an open letter criticizing the FTC’s analysis as flawed and disregarding the true picture of the office supplies marketplace, notably Amazon’s recent entry into the space. "The landscape of history is littered with companies who have been killed or bankrupt by digitized companies like Amazon," Sullivan reiterated in court Monday, according to Reuters.

Antitrust advocates like the American Antitrust Institute have warned that, while online retail mitigates the anti-competitive effects of a merger somewhat, competitive concerns remain in the office supplies segment. The AAI has dismissed Amazon as a competitor in the business supplies space, though it's not clear whether they are basing their analysis on Amazon's foray into the space announced last year.

To give a sense of the size of Staples’ sales through business contracts, its commercial business will likely generate some $8.4 billion this year, while its 1,200 stores earn some $9.6 billion.

In an effort to save the merger deal, Staples has offered to bring some $600 million in contracts to office supply wholesaler Essendant, formerly United Stationers, which could presumably boost the business of much smaller company supplies retailers like ULINE and W.B. Mason. Essendant has been consolidating and expanding its own wholesale business, and said during an earnings call in October that it would be open to acquisitions, although the company didn’t comment on the specific idea of acquiring any of Staples' business. A similar concession by Staples helped it garner EU approval of the merger earlier this year. 

Staples CEO Ron Sargent said earlier this month that the retailer is working on a “Plan B” in case the Office Depot merger fails. Speaking on a conference call, Sargent said the FTC has “an incredibly narrow” definition of Staples’ office supply business, adding that Staples has been mulling contingency plans including boosting sales of non-office supplies and shuttering more stores.

“Our commitment to the acquisition hasn’t changed," Sargent told analysts, the Boston Herald reports. "Our top priority is to get the deal done.”