Avery & 3M Deal Scrapped (ACCO) (AVY) (BMS) (MMM)

The agreement between Avery Dennison Corporation (AVY) and 3M Co. (MMM) related to the sale of Office and Consumer Products business has been called off. The reason for the termination of the deal has not been divulged by either of the companies. However, Avery confirmed that it will continue to search for a prospective buyer for its business.

Earlier in September, both the companies had clarified that the agreement was still on despite a news release from the U.S. Department of Justice (DOJ) declaring the abandonment of the deal. The DOJ had informed the companies that it would file a civil antitrust lawsuit to block the deal. According to the DOJ, the proposed merger will give 3M Co. more than an 80% share of both the U.S. labels and sticky notes markets and result in reduced competition in the labels and sticky notes market. This would in turn lead to higher prices and reduced innovation for products that millions of American consumers use every day.

Avery Dennison’s Office and Consumer Products unit manufactures and sells a wide range of office and printable media products under the Avery Dennison brand. The company had long held a strong position in the labels business. 3M Co. sold sticky notes under its Post-it Brand.

In 2009, 3M entered into the labels market, intensifying the competition for Avery Dennison. In retaliation, Avery Dennison lowered wholesale prices, increased promotions and customer rebates and accelerated innovations in labels. Avery Dennison also started selling its own brand of sticky notes.

However, the business was affected due to weak end-market demand and increased competition. Increased investment in demand creation, consumer promotions, and innovation, as well as lower volume hampered margins. Consequently, in December 2011, Avery agreed to sell its Office and Consumer Products Group, for approximately $550 million to 3M Co.

Avery’s decision to sell the underperforming Office and Consumer Products business is a wise move. Avery has initiated its second phase of restructuring initiative that is expected to be completed by mid-2013 and reduce costs across all of its segments. More than $100 million in annualized savings is estimated from this program. Further share repurchases and dividend hikes could fundamentally improve investor sentiment. Avery generates one third of its revenue from Europe and given the weak demand in the region, we maintain a cautious stance. Furthermore, rising raw materials prices, negative currency translation remain headwinds. Shares of Avery currently retain a Zacks #4 Rank (short-term Sell rating).

St. Paul, Minnesota-based 3M Company, together with its subsidiaries, operates as a diversified technology company with manufacturing operations spread over 60 countries worldwide. It has more than 35 business units organized into six segments: Consumer and Office, Display and Graphics, Electro and Communications, Healthcare, Industrial and Transportation, and Safety, Security and Protection Services Business.

Pasadena, California-based Avery Dennison produces pressure-sensitive materials, office products and a variety of tickets, tags, labels and other converted products. Avery is a Fortune 500 company operating over 200 manufacturing and distribution facilities with roughly 32,000 employees in more than 60 countries. It competes with Bemis Company Inc. (BMS), ACCO Brands Corporation (ACCO) and 3M Co.