(AVY) Avery Dennison Selling Office Business

Avery Dennison Corporation (AVY) is divesting its underperforming Office and Consumer Products to its competitor 3M Co. (MMM), the maker of Post-it notes and Scotch Tape, for $550 million in cash.

The Office and Consumer Products segment contributed approximately 13% to Avery’s total revenue in fiscal 2010 and in the most recently reported third quarter of 2011. The segment manufactures and sells a wide range of office and printable media products under the Avery brand name for office, school and home uses.

The segment also offers an array of stationery products, including writing instruments, markers, adhesives and specialty products under popular brand names such as Avery, Marks-A-Lot and HI-LITER.

This is a long-struggling segment of Avery with weak end market demand, facing cutthroat competition in the label category. Margins have been affected due to increased investment in demand creation, consumer promotions, and innovation, as well as lower volumes.

Demand for office supplies has suffered in recent years as businesses and governments slashed spending on administrative operations because of lower revenue. Moreover, profit margins on office products have come under pressure as retailers such as Staples, Inc. (SPLS) and Office Depot, Inc. (ODP) have expanded the product lines of their own-store brands.

Avery estimates the segment to generate sales of approximately $765 million in 2011, a 6% drop from 2010 sales of $816 million. Adjusted operating income and earnings before interest, taxes, depreciation and amortization (EBITDA) is projected at approximately $80 million and $95 million, respectively. Avery Dennison Corporation expects total sales in 2011 to be approximately $6 billion sans Office Consumer Product.

Avery Dennison had earlier reduced its fiscal 2011 EPS guidance to between $2.15 and $2.30 following apprehensions of continued weakness in volumes.

The transaction is expected to be completed in the second half of 2012. Avery Dennison intends to use the proceeds from the transaction primarily to reduce debt, make additional pension contributions and repurchase shares.

As of October 1, 2011, Avery’s cash and cash equivalent plunged to $119.7 million from $157.8 million at October 2, 2010. Long-term debt also decreased to $954.5 million as of October 1, 2011 from $1.07 billion as of October 2, 2010.

Avery Dennison reported a disappointing third quarter with its adjusted EPS plunging 23% year over year to 48 cents. However, revenues of $1.7 billion rose 4% year over year on revenue growth in two segments – Pressure-sensitive Materials and Other specialty converting businesses. Specifically, revenues of the Office and Consumer Products segment fell 4.4% to $219.7 million.

Avery’s largest business is the manufacturing of pressure-sensitive materials, which include labels for foods, beverages and auto interiors. Its retail branding and information solutions arm produces garment tags and other services.

The company experienced unexpected declines in volumes in both the segments across all geographical regions in the second quarter that continued into the third. Now with the weaker Office Products business sold out, the company will be able to focus on its market-leading, pressure-sensitive materials business, and Retail Branding and Information Solutions segment.

We have recently downgraded our recommendation on Avery from Neutral to Underperform reflecting lower volume expectations for the fourth quarter of 2011, a higher tax rate and weak results in two of its largest businesses. The shares of Avery Dennison are currently maintaining a Zacks #5 Rank (Strong Sell rating) over the short term that corresponds with our Underperform recommendation.

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 primarily with Bemis Company Inc. (BMS) and Fortune Brands Inc. (FO).

AVERY DENNISON (AVY): Free Stock Analysis Report

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