3M Dropping Office Unit Deal Leaves Avery Seeking Buyer

3M Co.’s retreat from a $550 million office-products purchase amid regulatory pressure will let it focus on an even bigger acquisition while forcing deal partner Avery Dennison Corp. to put the unit back on the block.

Avery fell the most in a month today following yesterday’s announcement. Investors may be concerned that Avery will struggle to get another offer and a price that comes close to 3M’s, said Ghansham Panjabi, an analyst at Robert W. Baird & Co. in New York.

“When one of the national bidders is out of the process now, then by definition there are fewer bidders for the asset,” Panjabi said. “The likelihood of the sale is pretty high. The question is, ‘At what price does it get done?’”

3M terminated the Jan. 3 sale accord to buy Avery’s office-products business amid U.S. Justice Department opposition because of overlap between the companies. The move reversed 3M’s pledge last month to keep pursuing federal approval and came after Chief Executive Officer Inge Thulin agreed Oct. 1 to pay $860 million for ceramics maker Ceradyne Inc.

Avery slid 4.6 percent to $29.99 at 9:48 a.m. in New York. The stock dropped as much as 6.2 percent for the biggest intraday decline since Sept. 4. St. Paul, Minnesota-based 3M rose 0.2 percent to $93.80.

3M Statement

Avery said yesterday it would continue to seek a buyer for the office products division, which provided 13 percent of 2011 sales. The Pasadena, California-based company wants to dispose of the unit as profit drops because of waning U.S. consumer demand and private-label competition, said Panjabi, who has a neutral rating on the stock.

“While we are disappointed with this turn of events, we remain focused, as always, on investing in product innovation,” Jesse Singh, vice president and general manager of 3M’s Stationery and Office Supplies Division, said in a statement.

The takeover would have given 3M more than 80 percent of the U.S. market for labels and sticky notes, the Justice Department said in September. 3M and Avery said last month they would “explore options” to respond to the department’s concerns and win regulatory approval.

3M had planned to complete the purchase in the second half of this year, and would have been able to use its global reach to distribute Avery brands such as Hi-Liters and Marks-A-Lot markers, which are sold chiefly in the U.S. Revenue of $6 billion for Avery last year compared with 3M’s $30 billion.

Justice Review

The Justice Department’s examination of the deal found that 3M and Avery have dominated adjacent segments of the office products business for many years, with Avery making labels and 3M selling sticky notes under its Post-it brand.

The two companies are the largest label makers in the world, according to Deane Dray, an analyst at Citigroup Inc. in New York. Dray last month said the acquisition was small for 3M, adding only 3 cents a share to his $6.75 earnings forecast for next year.

Avery CEO Dean Scarborough told analysts on Sept. 5 he disagreed with the Justice Department’s findings that the purchase would hurt consumers, saying the combination would allow for more spending on research to make the products more innovative and competitive.

Thulin announced a reorganization of 3M yesterday, reducing the number of units to five from six. He also shuffled some businesses and executives among the units “to increase relevance to our customers,” according to a statement.

On Oct. 1, 3M agreed to buy Costa Mesa, California-based Ceradyne as Thulin seeks to augment growth that has been hampered by Europe’s recession and what may be China’s weakest economic growth since 1990.

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