Office Depot Inc. said Wednesday it agreed to buy OfficeMax, owners of Grand & Toy, in an all-stock deal that would transform office supply retail sector.

Boca Raton, Fla.-based Office Depot Inc. and Naperville, Ill.-based OfficeMax said holders of OfficeMax shares will receive 2.69 shares of Office Depot for every OfficeMax share they own.

That's equal to about $13.50 per share, based on Office Depot's $5.02 per share closing price Tuesday, giving the deal a total value of about $1.2 billion. OfficeMax had about 86.7 million shares outstanding as of Oct. 26, according to SEC filings.

OfficeMax owns Grand & Toy in Canada, but doesn't operate any stores under the OfficeMax name.

Grand & Toy has 22 retail stores in Canada, and 18 branch offices that offer business services. Office Depot has no stores in Canada, but does offer online shopping.

The move would combine the No. 2 and No. 3 office supply retailer and lead to consolidation in an industry that analysts have said for years is overstored. It reflects the changing retail landscape as "big box" stores become outmoded and more people shop online.

Office Depot and OfficeMax, along with bigger rival Staples Inc., were all founded in the mid- to late 1980s and helped pioneer the big-box boom in the 1990s, expanding rapidly in the U.S.

But the rise of Web retailers like Amazon.com and more expansion into office supply categories by discounters like Costco and Wal-Mart has been tough on the sector. In addition, office suppliers were slow to bounce back from the recession, as consumers and small businesses alike cut back on ordering office products.

The companies have closed stores, slashed costs and streamlined operations to offset stagnant sales. Rumours about possible consolidation have swirled around the sector for years but nothing ever materialized.

Staples is much larger than its smaller rivals, with 2,295 stores worldwide and a market capitalization of $9.56 billion. In contrast Office Depot's market capitalization is $1.43 billion and OfficeMax is $1.13 billion. Market capitalization is the market value of a company's outstanding shares and can be used to measure a company's size.

The deal still has to go through shareholder and regulatory approvals, and office supply mergers have been questioned by regulators in the past. In 1997, Staples Inc. attempted to buy Office Depot but the deal was nixed by the Federal Trade Commission due to concerns the combined company would have too much of a competitive advantage in the marketplace.

Office Depot shares closed down 84 cents, or 16.7 per cent, to $4.18 on the New York Stock Exchange. OfficeMax shares fell 0.91, or 7 per cent, to $12.09 in trading on the NYSE.

with files from CBC News