Avery’ announcement on 3 January that it had agreed to sell off its Office and Consumer Products (OCP) division didn’t come as much of a surprise in itself – rumours had surfaced last spring that the struggling division could be up for sale. However, the fact that the acquirer was 3M certainly raised a few eyebrows, with Esselte widely tipped to make a move for OCP.
Nevertheless, 3M’s $550 million acquisition certainly looks to make sense. It has taken out a major competitor in two of its key categories, has acquired a strong brand, and is set to achieve cost and efficiency synergies that will boost its own bottom line.
Avery has said it expects OCP to post 2011 EBITDA of $90 million, meaning 3M is paying a purchase price/EBITDA multiple of around 5.8, a figure described by Morningstar analysts as “very palatable”
OCP has been struggling with falling sales and profits for the last few years. 2011’s annual sales of $765 million represent a top-line decline of just over 6% from a year earlier. In fact, you have to go back to 2004 to find a positive year of sales growth for OCP. That year, the division’s revenues stood at $1.17 billion, so it has lost over $400 million (or 35%) of its top line in the last seven years.
In terms of profits, operating income has fallen from $186 million in 2004 to $80 million in 2011, while operating margin also headed south in the period.
In contrast, 3M’s Consumer and Office (C&O) division has continued to grow. In the third quarter of 2011 the division posted an organic sales increase of 4.6% while operating margin was over 22%. Annual sales at C&O are now at around $3.5 billion and 3M has an aggressive strategy to hit $5 billion by the end of 2014.
Admittedly, C&O is not just about office supplies and stationery – these units represent about 40% of the division’s total sales, or approximately $1.5 billion a year. Adding Avery boosts that figure to around $2.3 billion, making C&O the leading global office supplies vendor ahead of the new ACCO/Mead business.
One reason for the continued sales and profit decline in OCP over the last couple of years has been the entry of – ironically – 3M into the labels category where, notably, it won the Office Depot account and also made a significant acquisition in Asia when it purchased Japan’s A-One in 2010. Printable media represents around two-thirds of OCP’s sales and it was forced into a ‘spend to defend’ strategy, which hit margins.
A sticky end?
One thing that the OCP acquisition does not include is Avery’s repositionable product line of sticky notes, label pads and note tabs. 3M is already a market leader with its Post-it brand, so clearly Avery brought little to the table with its presence in this category. Indeed, it’s an opportunity for 3M to take out Avery in this space.
Avery confirmed to OPI that it would be retaining these product categories, adding that it was “evaluating ways to gain value” from them. Quite what value, if any, can be gained is questionable. The Avery brand name and logo will be the property of 3M in the office and consumer space after the sale and 3M has the right to use these to market its own repositionable products if it desires.
Furthermore, Avery uses third-party suppliers for repositionable adhesives, so it’s difficult to see what assets it has that could be worth anything and it may be a question of simply discontinuing the category altogether. That doesn’t mean to say that a third party – either an established brand such as an ACCO or an Esselte, or even one of Avery’s existing suppliers – might not see value in the category as a viable alternative to 3M.