Office suppliers make big moves

US office suppliers don't capture many headlines, but they were in focus today amid LBO and M&A speculation.

Office Depot, the second-largest company in the sector, is in discussions with smaller rival OfficeMax about a possible merger, according to various media reports. Office Depot has had a large activist shareholder since September, so change was probably inevitable at some point.

Nonetheless, the CDS market reacted in a dramatic fashion. Office Depot's spreads rallied by a massive 214bps to trade at 285bps, its tightest level since June 2008.

OfficeMax's CDS rarely trade, so it is difficult to assess the impact on the firm's credit standing until the structure of the potential merger is known. But markets are clearly of the opinion that the deal is positive for Office Depot from a credit perspective and likely to succeed.

A combined group would be able to cut costs significantly and have a stronger position in an industry dominated by Staples, which is itself the subject of takeover speculation. Reports suggest that Staples have been in talks with private equity companies about a possible LBO.

Staples' industry dominance might be attractive to some buyout houses, but the office supply sector has been struggling with changes in technology and there are risks that finances could suffer in the future.

The company is investment grade, but was already trading at an implied level of 'BB' before the LBO speculation, according to Markit data. Staples' spreads were 14bps wider at 318bps, making it one of the weakest credits in the Markit CDX.NA.IG index.

Elsewhere, a better than expected ZEW economic sentiment survey in Germany helped boost sentiment. The Markit iTraxx Europe was 2bps tighter at 11bps.

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