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Avery Divests OCP and DES Businesses

Zacks Equity Research

Avery Dennison Corporation (AVY) divested both its Office and Consumer Products (:OCP) and Designed and Engineered Solutions (DES) businesses to CCL Industries Inc., a global leader in specialty packaging solutions, for $500 million.

The transaction is subject to customary closing adjustments, but it is expected to be finalized in the third quarter. The net sale proceeds of approximately $400 million will be utilized to repurchase shares and contribute toward an additional pension plan.

Avery’s Office and Consumer Products segment has been struggling for a long time. The business was affected by weak end-market demand and increased competition. Increased investment in demand creation, consumer promotions and innovation, as well as lower volume hampered margins. In Dec 2011, Avery had first entered into an agreement to sell the segment for approximately $550 million to 3M Co. (MMM).

However, the deal was scrapped in October last year and Avery continued to search for a prospective buyer for the business. In Jan 2013, Avery agreed to divest the segment along with its Designed and Engineered Solutions businesses to CCL Industries Inc.
With the divestiture of the weaker Office Products business, Avery will be able to focus on its market-leading, pressure-sensitive materials business and Retail Branding and Information Solutions segment.

In order to attain its financial targets of double-digit earnings growth and higher returns, Avery aggressively implemented a restructuring program in the second quarter of 2012 to reduce cost across all the business segments.

The program is anticipated to be completed by mid-2013. Avery expects to save more than $100 million annually by leveraging this program by mid-2013.

Avery remains committed to its long-term targets (by 2015) of sales growth in the range of 3% to 5% and net income growth of 10-15%. Earnings per share growth of 15-20% is expected to be achieved through continued growth in emerging markets and productivity improvements.

In addition, the company expects to generate free cash flow of around $1.2 billion - $1.4 billion over the 2012-2015 timeframe or $1.6 billion -$1.8 billion (including $400 million from the abovementioned sale). This will be utilized toward - $150-300 million in debt repayment, more than $200 million for acquisitions and $1-1.5 billion will be returned to shareholders over the period in combined share buyback and dividends.
Avery currently retains a Zacks Rank #2 (Strong Buy). Other stocks in the same industry with favorable Zacks rank are CompX International Inc. (CIX) and Herman Miller Inc. (MLHR), both carrying a Zacks Rank #2 (Buy).

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