Office Products Deal May Still Look Good on Paper

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Avery Dennison Corp.’s plan to sell its office products division to focus more on its core labeling and packaging businesses is proving to be tough to execute.

Late last month, the Department of Justice rejected the Pasadena label and packaging company’s proposed $550 million sale of the office and consumer products division to 3M Co., the Minneapolis-based manufacturing conglomerate, claiming the sale would give 3M 80 percent dominance in the label and sticky notes business.

Executives at Avery Dennison, along with their counterparts at 3M, said last week that they intend to reconstitute their deal to satisfy the Justice Department’s concerns, but that could take some time. And trying to meet those concerns might lead 3M to walk away. In that case, Avery Dennison would have to hunt for another buyer.

“Completion of the deal is now uncertain,” said Jeff Windau, an industrials analyst with Edward Jones in St. Louis who follows 3M.

Avery Dennison’s office and consumer products division sells binders, note pads, dividers and other items. It also makes a line of Martha Stewart-endorsed products that sell in Staples stores, including “pantry pockets” that can hang in kitchen cupboards.

Avery Dennison had launched the unit 30 years ago as computers became commonly used at work and home. The company saw a growing market for printable media related to that revolution.

According to Ghansham Panjabi, analyst with Robert W. Baird & Co. in New York, the unit’s profitability has been steadily sliding over the last decade. One reason: The office supply store industry has undergone tremendous consolidation into a handful of superstore chains, chiefly Staples Inc. of Framingham, Mass.; Office Max Inc. of Naperville, Ill.; and Office Depot Inc. of Boca Raton, Fla. That leaves fewer outlets for suppliers such as Avery Dennison to sell to.

Also, during the last five years, white-collar office employment has declined, meaning fewer end customers for Avery Dennison’s office products.

“With all this consolidation and shrinking customer base, growth in office products has come under pressure,” Panjabi said.

The office and consumer products division had sales of roughly $760 million last year, about 13 percent of the company’s $6.03 billion in 2011 revenue. But Chief Executive Dean Scarborough said the company decided to sacrifice those sales in order to focus on its core labeling and packaging businesses.

“Our focus is on returning more cash to shareholders. We think we’ve got two strong businesses, both of which throw off good free cash flow,” Scarborough told analysts in an earnings conference call in January, four weeks after the sale to 3M was announced.

Under terms of the sale, 3M was to pay Avery Dennison $550 million in cash, which Scarborough characterized in a press release as “the best opportunity to maximize OCP’s value for Avery Dennison shareholders.”

For 3M, the deal represented a way to strengthen its presence in labels and other printable media.

But the Justice Department’s antitrust division saw things differently. According to a Sept. 4 press release, it said that the deal would lessen competition in the market for labels and sticky notes because 3M would have an 80 percent share after the sale.

The press release said the deal would have led to “higher prices and reduced innovation for products that millions of American consumers use every day.”

The release said that the companies had abandoned the deal. But if they hadn’t, the Justice Department would file suit to block it. That news sent Avery Dennison’s stock down 5 percent to $29.60. Shares rose a bit the next day.

But later that day, in a highly unusual move, Avery Dennison and 3M issued a joint statement saying the deal had not been abandoned. Rather, the companies had pulled back so they could work on changes to meet the department’s concerns.

Reviewing options

No timetable was given for resubmitting the deal, but Scarborough told an investor presentation Sept. 5 that Avery Dennison would take the next few weeks to review its options.

Analysts said Avery Dennison will now have to tread a very fine line to preserve the deal. On the one hand, enough product lines must be removed from the transaction so that 3M holds lower market dominance. But if they take out too many product lines, the deal might no longer be attractive to 3M.

“It is likely that 3M will have to sell part of the acquired business or not obtain certain product lines,” Edward Jones analyst Windau said in a research note last week. “Management may feel that makes the combination less attractive.”

He added that 3M might balk at having to sell certain product lines itself, because of the possible difficulty in lining up buyers, especially under a Justice-imposed deadline.

If the sale does not go through, Avery Dennison must then try to find another buyer for its office and consumer products unit. That’s entirely possible, one analyst said.

“Because the office products market is a consolidating sector, there likely will be other buyers for the unit, including private-equity buyers,” said Robert Baird analyst Panjabi.

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Howard Fine
Howard Fine is a 23-year veteran of the Los Angeles Business Journal. He covers stories pertaining to healthcare, biomedicine, energy, engineering, construction, and infrastructure. He has won several awards, including Best Body of Work for a single reporter from the Alliance of Area Business Publishers and Distinguished Journalist of the Year from the Society of Professional Journalists.

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