This document analyzes the potential merger of Office Depot and Office Max. It provides financial details for each company individually and projections for the combined company. Key metrics like levered beta, cost of debt, tax rates, and growth rates are given. Income statements include sales, expenses, earnings, and margins. Valuations are performed to estimate the present value of future cash flows for each company and the combined entity. The potential value of synergies from a merger is estimated at $222.9 million, representing a 24.34% premium over the independent valuations.

1. Analysis Date February 19, 2013
Market Inputs
Current riskfree rate (Rf) 1.71%
Risk Premium (Rm - Rf) 5.00%
Office Depot (ODP) Office Max (OMX) After Merger Terminal Year
General Input
Levered (Equity) Beta 3.52 2.68 2.37 2.61
Pre-tax cost of debt 1.71% 1.71% 1.71% 1.71%
Tax rate 40.00% 40.00% 40.00% 40.00%
Debt to Equity (D/E) 70% 90.00% 60.00% 60.00%
Reinvestment Rate (b) 50% 50.00% 50.00% 50.00%
Length of growth period 5 5 5
Assets $4,010,780,000 $4,069,280,000 $8,080,060,000 $8,080,060,000
Long Term Debt $485,330,000 $1,699,320,000 $2,184,650,000 $2,184,650,000
Income Statements
Sales $10,695,652,000 $7,121,170,000 $17,816,822,000 $17,816,822,000
Cost of Sales $7,448,070,000 $5,311,990,000 $12,760,060,000 $12,760,060,000
Gross Profit $3,247,582,000 $1,809,180,000 $5,056,762,000 $5,056,762,000
SG&A and Other Expenses $3,208,200,000 $1,690,970,000 $4,899,170,000 $4,899,170,000
Research & Development $0 $0 $0 $0
Depreciation/Amortization $0 $0 $0 $0
Unusual Expense $0 $11,200,000 $0 $0
Other Operating Expenses $0 $20,530,000 $0 $0
Operating Income (EBIT) $39,382,000 $86,480,000 $157,592,000 $157,592,000
Other Non Operating Income $0 $0 $0 $0
Interest Expense $8,282,472 $29,000,000 $37,282,472 $37,282,472
EBT $31,099,528 $57,480,000 $120,309,528 $120,309,528
Income Tax $12,439,811 $22,992,000 $48,123,811 $48,123,811
Net Income (NI) $18,659,717 $34,488,000 $72,185,717 $72,185,717
Calculations
NOPAT $23,629,200 $51,888,000 $94,555,200 $94,555,200
Profit Margin (NI/Sales) 0.17% 0.48% 0.41% 0.41%
Asset Turnover (Sales/Assets) 2.67 1.75 2.21 2.21
Debt to Asset (D/D+E) 41% 47% 38% 38%
Asset/Equity 170% 190% 160% 160%
M&A Synergy Potential and Premium Calculation
| Deb Sahoo | MBA, Finance, University of Michigan | MS, EE, University of Southern California | B-Tech, EE, IIT |

2. ROE 0.79% 1.61% 1.43% 1.43%
Sustainable Growth Rate (ROE*b) = 0.40% 0.81% 0.71% 0.71%
Unlevered (Asset) Beta 2.48 1.74 1.74 1.92
Cost of Equity (Re)= 19.31% 15.11% 13.54% 14.76%
After-tax cost of Debt = 1.02% 1.02% 1.02% 1.02%
Cost of capital, WACC = 11.78% 8.44% 8.85% 9.61%
Valuation
PV of FCFF in high growth = $110,222,516 $261,432,442 $471,348,819
Terminal Value = $204,612,436 $640,253,125 $1,019,918,540
Value of firm today = $227,480,413 $688,490,891 $1,138,907,533
Value of Potential Synergy
Value of independent firms $915,971,304
Value of combined firm $1,138,907,533
Value of synergy $222,936,230
Premium for control 24.34%