3M drops $550 million takeover of Avery unit

3M Co. dropped its $550 million takeover of Avery Dennison Corp.'s office-products unit after the Justice Department said it would sue if the companies didn't abandon the transaction, the government said.

The Justice Department said in an e-mailed statement that its investigation found that 3M and Avery have dominated adjacent spaces in the office products business for many years, with Avery making labels and 3M selling sticky notes under its Post-it brand.

The merger would have given Maplewood-based 3M more than 80 percent of the U.S. market for labels and sticky notes, according to the statement.

"We welcome the companies' decision to abandon this deal, which raised competitive concerns in the sale of labels and sticky notes," Joseph Wayland, acting assistant attorney general for the Antitrust Division, said in a statement. "As a result of the abandonment of this transaction, American customers will continue to receive the benefits of competition including lower prices and greater innovation in these basic office supplies."

3M, which announced the acquisition more than eight months ago, had planned to complete the purchase in the second half of this year.

Donna Fleming Runyon, a spokeswoman for 3M, and David Frail, a spokesman for Avery, didn't immediately return phone and e-mail messages seeking comment. Avery is based in Pasadena, Calif.

The deal would have combined the two largest labelmakers in the world, according to Deane Dray, an analyst at Citigroup Inc. in New York City.

"Obviously they had overlap; I would've thought that they would've thought that through on both sides more fully," said Ghansham Panjabi, a Roseland, N.J.-based analyst at Robert W. Baird & Co.

Avery probably will bring the business "back into continuing operations and evaluate it some other time," rather than seek another buyer right away, he said.

In January, when the deal was announced, 3M said the Avery Dennison unit would become part of 3M's office supplies division. At the time, the Avery Dennison unit had 3,000 employees around the world and recorded 2011 sales of about $765 million.

At the time, Avery Dennison's CEO, Dean Scarborough, said the sale provided "the best opportunity to maximize [the unit's] value for Avery Dennison's shareholders, and complements 3M's global portfolio."

When the deal was announced, Jeff Windau, an analyst at Edward Jones in St. Louis, said profit margins on Avery Dennison's products were about half those of 3M. "There's a real opportunity for 3M to improve margins [on Avery Dennison products] by putting them through 3M's global sales, marketing and distribution systems," he said.

3M 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's Dray. A-One is the top office and consumer label brand in Asia, he said.

The proposed transaction was small for 3M, which makes products from dental braces to commercial sealants, and its failure won't "move the needle" in a negative way for the $63.4 billion company, Dray said in a phone interview.

"It's not that material to 3M," he said. "The collection of products are very good quality, but they were more line extensions and gap-fillers rather than a pivotal part of the business model."