3M Seeks to Save Avery Unit Deal After Regulator Objections

3M Still in Talks to Buy Avery Unit After Regulator Objections
3M Co. the maker of Post-It notes, became the second-biggest global player in the label market behind Avery Dennison after it completed the 2010 purchase of a majority stake in Japanese label maker A-One’s consumer and office label business, according to Citigroup analyst Deane Dray. Photographer: Andrew Harrer/Bloomberg

3M Co., the maker of Post-it Notes, said it remains in talks to buy Avery Dennison Corp.’s office-products unit, hours after the U.S. Department of Justice announced that the $550 million deal had been abandoned.

The companies are “working together to explore options to address the DOJ’s concerns, obtain regulatory approval, and complete a transaction,” according to a joint statement early today. The Justice Department said late yesterday the deal had been dropped as it moved to block a sale on antitrust concerns.

A takeover would give 3M more than 80 percent of the U.S. market for labels and sticky notes, the Justice Department said. Some of Avery’s office-product lines, such as sticky notes, will probably have to be sold to win regulatory approval, said Jeff Windau, an analyst with Edward Jones in St. Louis.

“I would think over the next several weeks there will be a lot of talks with their contacts at the DOJ,” Windau said today in a telephone interview. He has a buy recommendation on St. Paul, Minnesota-based 3M.

3M and Avery said they had voluntarily withdrawn notification and report forms regarding the transaction. 3M, which announced the acquisition in January, had planned to complete the purchase in the second half of this year.

“By pulling it back, obviously 3M and Avery are looking at ways to satisfy the DOJ concerns,” Windau said. If the deal can be salvaged, it probably wouldn’t be completed in 2012, he said.

Office Dominance

The Justice Department inquiry found that 3M and Avery have dominated adjacent parts of the office-products business for many years, with Avery making labels and 3M selling sticky notes under its Post-it brand. The companies are the world’s largest label makers, according to Deane Dray, an analyst at Citigroup Inc. in New York.

The acquisition “does not move the needle” for 3M, adding only 3 cents to an earnings-per-share forecast of $6.75 for next year, Dray said.

“This was a rounding out of a product line” for 3M, Dray said. “It’s not like their business model hinges on these. They are nice-to-haves, but not must-owns.”

Avery, based in Pasadena, California, rose 0.9 percent to $29.86 at the close in New York after dropping 5.2 percent yesterday. 3M, whose products also include commercial sealants, work boots and teeth-whitening kits, rose less than 0.1 percent to $91.75.

‘A Hiatus’

Avery Chief Executive Officer Dean Scarborough said the Department of Justice informed the companies last week that it would sue to block the transaction, leading them to withdraw voluntarily the notification and reports. Over the next few weeks, 3M and Avery will look at options to make the deal acceptable to regulators, he said.

“We’re committed to getting the transaction done,” Scarborough said during a Bank of America Corp. conference today. “I would characterize this as a hiatus and certainly not a movement away from completing this transaction.”

Scarborough said he disagreed with the Justice Department’s determination that the combination will hurt consumers.

“This benefits customers and consumers because it provides a lower-cost platform, makes those products potentially more competitive and also enables a lot more innovation in the business,” Scarborough said.

Regulatory Concerns

Windau, the Edward Jones analyst, said it was a surprise that 3M hadn’t raised the regulatory concerns earlier. 3M Chief Executive Officer Inge Thulin said on a July 26 conference call that he still expected the transaction to be completed by the end of 2012.

The acquisition would be 3M’s biggest since paying $662.4 million to buy fingerprint-identification systems maker Cogent Inc. in 2010. It would let 3M add products such as Marks-A-Lot pens to a lineup of office goods that includes Scotch tape.

3M became the second-biggest global company in the label market behind Avery after completing the 2010 purchase of a majority stake in Japanese label maker A-One’s consumer and office label business, according to Citigroup’s Dray. A-One is the top office and consumer label brand in Asia, he said.

The Avery unit had 2011 sales of $765 million and $80 million of operating income, Scott Gaffner, an analyst with Barclays Plc in New York, wrote in a note yesterday. About 80 percent of the sales are in North America and 20 percent in Europe, he said. Two-thirds of sales are derived from labels and binders, and Avery will probably continue to seek the sale of the division, said Gaffner, who has an equalweight recommendation on Avery.

“Management has stated several times in the past that the office- and consumer-products market needs to be consolidated, but that it was not going to be the consolidator,” Gaffner said. “We don’t think management’s stance on this subject will change.”

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