Acquisitions boosting Avery's debt load, worry ratings firm. (Corporate Focus).

AN uncharacteristic buying spree by Avery Dennison Corp. has debt analysts at Moody's Investor Service wringing their hands, but Philip Neal, chairman and chief executive of the Pasadena-based company, isn't worried.

The debt rating service placed Avery Dennison's senior unsecured debt and commercial paper on review Sept. 25 for possible downgrade. Moody's is concerned over the ability of Avery, a maker of labels and pressure-sensitive adhesives, to quickly integrate three recent, debt-financed acquisitions, and bring its debt ratios back down to normal levels.

Neal is confident. He said the acquisitions, which will temporarily strain Avery Dennison's balance sheet, are private companies he's coveted for some time. That they all became available at one time, he said, is coincidence.

"I don't view Moody's (review)... as any big deal," Neal said. "Our cash flow is strong. We'll get (debt ratios) back down in line and they'll be happy."

Together, the three acquisitions add about $600 million to Avery Dennison's annual revenues, which were $3.8 billion in 2001. Their full cost, and the impact on Avery Dennison's balance sheet, won't be revealed until next year, after Avery Dennison completes the last of the transactions.

"Moody's is concerned that the execution of these acquisitions over such a short period of time, combined with the current economic uncertainty, will limit the ability of Avery to return its credit metrics" to adequate levels, Moody's said in launching the review.

In May, Avery Dennison bought a European competitor, Jackstadt GmbH of Germany, for $300 million in cash and assumed debt. The company, with about $400 million in annual revenues, was the largest acquisition for Avery Dennison since its creation via the merger of Avery International with Dennison Manufacturing Co. in 1990.

At Jackstadt, customers were taking too long to pay their bills, depriving the German firm of cash it could use in its business, said Ghansham Panjabi, a Lehman Brothers analyst who rates Avery Dennison a "hold."

"The company was poorly managed," said Panjabi said.

The impact of the deal can already be seen on Avery Dennison's second quarter balance sheet.

The new debt, along with absorption of Jackstadt's liabilities, raised Avery Dennison's current liabilities to $1.3 billion at June 29, from $916 million at March 30. A closely watched debt ratio, debt-to-capital, rose to 51.6 percent from a more desirable 48 percent at March 30.

Last month, Avery Dennison agreed to buy two closely aligned companies, RVL Packaging Inc. of Westlake Village and L&E Packaging of Greensboro, N.C. for an undisclosed price. Those acquisitions are expected to raise Avery Dennison's debt-to-capital to between 52 and 53 percent, Neal said. The company has told financial analysts it aims to pay debt down to 45 percent of capital by the end of 2003.

Seizing opportunity

In down markets, strong players often take market share. Neal contends the acquisitions will strengthen Avery Dennison in one of its two key markets, and give a boost to a third area that is a growth priority.

Jackstadt is a direct competitor to Avery Dennison's Fasson Roll business, which sells base materials for making labels on everything from shampoo bottles to wine. Feedstock, adhesives and other "raw materials" make up 40 percent of Avery Dennison's revenues; the Jackstadt acquisition boosted Avery Dennison's European market share by 12 percentage points, Neal said.

Over the next 18 months, Avery Dennison plans to reduce costs by shutting plants and consolidating distribution facilities, cutting about 1,000 jobs worldwide.

"It was an opportunity we just could not pass up," Neal said. "It's not often you get a chance to buy a company that's smack dab in the middle of your core business."

He noted that the Jackstadt integration is moving along ahead of schedule, and that it's affecting a different part of the company than the RVL and L&E acquisitions.

Those acquisitions give a leg up to Avery in providing apparel labels to large retailers like Wal-Mart Stores Inc. or Gap Inc. Avery can print up bar code tags for a piece of clothing made anywhere in the world, and track it all the way to the retail store, Panjabi said.

Panjabi is less concerned about Avery Dennison's strategy or its execution than outside factors such as the behavior of consumers shopping for office products -- the company's other big market segment.

"You're seeing really shaky consumer data," he said, pointing to recently lowered earnings guidance by Wal-Mart and other retailers. He wonders whether parsimonious shoppers skipped Avery branded labels and or Hi-Liter marking pens for private label items during the back-to-school season. Such stinginess could force Avery to cut prices, and put a squeeze on operating margins.

Last week, Neal said he was on "pins and needles" waiting for September sales results to come in. But he said the company hadn't seen any impact on operating margins in these lines, and consumers continue to buy them. "I think everything's going OK," he said.

Financial Editor Anthony Palazzo can be reached at 323-549-5225, ext. 224, or at [e-mail].

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YEAR (Dec. 29)

                                 2001      2000

Revenue (millions)           $3,803.3  $3,893.5
Total Expenses (millions)     3,443.5   3,467.2
Operating Income (millions)     359.8     426.3
Net Income (millions)           243.2     283.5
Earnings Per Share              $2.49     $2.88

SUMMARY

Business: Maker of labels and adhesives

Headquarters: Pasadena

CEO: Philip Neal

Market Cap: $6.5 billion

Dividend Yield: 2.2%

Total Liabilities: $2.3 billion

P/E Ratio: 23.1

Long-Term Debt: $668.3 million