Dive Brief:

• U.S. District Court Judge Emmet Sullivan in the District of Columbia on Tuesday granted the Federal Trade Commission's (FTC) request for an injunction against the $6.3 billion merger of office supply rivals Staples and Office Depot, according to Reuters. 
• Staples said Tuesday evening it will terminate the proposed merger as a result of the ruling. Per the terms of the merger agreement, Staples will pay Office Depot a $250 million break-up fee. Staples also will scrap an agreement to sell more than $550 million in corporate contract business and related assets to Essendant in connection with the move to end the Office Depot deal.
• “We are extremely disappointed that the FTC’s request for preliminary injunction was granted despite the fact that it failed to define the relevant market correctly, and fell woefully short of proving its case,” Ron Sargent, Staples’ chairman and chief executive officer, said in a press release. “We believe that it is in the best interest of our shareholders, customers and associates to forego appealing this decision, terminate the merger agreement, and move on with our strategic plan to drive shareholder value."
• Shares of both Staples and Office Depot were down in after-hours trading on news of the injunction: Staples fell 10%, while Office Depot tumbled 26%. 

Dive Insight:

More than a year after Staples first announced a definitive agreement to acquire all of Office Depot’s outstanding shares, Judge Sullivan’s decision brings to an end speculation about the fate of the combined company. 

The deal would have created an international office supply goliath that would have relied on its impressive brick-and-mortar presence to neutralize the growing threat posed by online competition. In its filing contesting the merger, the FTC argued that the combined company would wield too much power and influence in the business contracts space, impeding competition.

The Staples/Office Depot deal has been in jeopardy since December 2015, when the FTC filed a federal complaint to block the merger over antitrust concerns. Had Judge Sullivan determined that the FTC had not established its case and denied the injunction, Staples and Office Depot would likely have been able to close the merger deal. However, with the injunction being granted, the FTC can now hold its own separate administrative trial to conclude if Staples and Office Depot are violating antitrust laws.

Staples and Office Depot have previously stated that the administrative trial will not happen because they planned to withdraw the merger proposal if Sullivan approved the injunction and side with the FTC.

Recent earnings reports suggest that both Staples and Office Depot face grim futures after Judge Sullivan ruled in the FTC’s favor. Speaking on a March conference call after Staples reported underwhelming Q4 2015 results and revealed plans to close 50 stores this year, Staples CEO Sargent said the FTC took “an incredibly narrow” definition of Staples’ office supply business. He added that the company had been mulling contingency plans for several months in case the Office Depot deal was blocked.

Office Depot CEO Roland Smith last month blamed the ongoing legal wranglings for his company’s disappointing first quarter 2016 results, stating: “Our North American Business Solutions Division and International Division are more impacted by this disruption and accordingly, both failed to meet our sales and profit expectations this quarter.”

Staples said Tuesday it will now look to increase products and services beyond office supplies, and plans to grow market share in categories like office supplies, ink, toner and paper. The company also will invest in lower prices and improved supply chain capabilities, and plans to add more than 1,000 associates to its mid-market sales force. Staples additionally will cut $300 million in annual costs and explore strategic alternatives for its European operations.

Office Depot divulged few details on its next steps. “As the Staples merger process comes to an end, we look forward to re-energizing our business," Smith said in a statement. "We remain committed to delivering our 2016 Critical Priorities and realizing the remaining synergies and efficiencies that come from the integration of Office Depot and OfficeMax. Once the Staples merger agreement is formally terminated, we plan to host an investor conference call on May 16 to discuss next steps in our go-forward strategy.”

The FTC applauded the judge's decision. “Today’s court ruling is great news for business customers in the office supply market,” FTC competition chief Debbie Feinstein said in a statement cited by the Wall Street Journal. “This deal would eliminate head-to-head competition between Staples and Office Depot and likely lead to higher prices and lower quality service for large businesses that buy office supplies.”