Avery agrees to $500 million stock swap merger; Pasadena company will buy office products maker.

Avery agrees to $500 million stock swap merger

Pasadena company will buy office products maker

Wall Street analyst said they like Pasadena-based labelmaker Avery International Corp.'s $500 million stock-swap merger with office products maker Dennison Manufacturing Co., but Avery stock plunged last week anyway on weak earnings.

Avery, which traded at $28.375 a share on the Big Board before the merger was announced on May 25, fell to $23.675 in late trading last week.

Avery reported last Wednesday it expects second-quarter earnings to be 10 percent below 1989's second quarter.

The new, merged company, to be called Avery Dennison Corp., will have combined annual revenues of about $2.5 billion and a work force of 19,200 employees.

Avery's products include self-sticking labels, tapes and other materials, while Dennison's lines feature stationery, office supplies, printing systems and fastener products.

Wall Street analysts like the merger. "It appears to be a good long-term fit," said John Spencer, analyst with New York-based brokerage house Wertheim Schroder. "In the short-term, both companies are having earnings problems in their own market. . . but long-term it should work out."

Said Robert Bartels of Chicago-based brokerage house William Blair, "I think the merger is positive. We are reaffirming a long-term `hold' on Avery shares. We think Avery can probably improve Dennison's profit margins, and thus improve Avery's growth. In the short-term, however, there may be some costs associated with the merger."

Bartels praised Avery's management, and noted that Avery's Charles Miller will remain in the chief executive position of the merged company, and said most likely Avery officials will be in the chief operating and chief financial positions as well.

Analyst Sally Schaadt of New York-based brokerage house Fourteen Research said the deal was a surprise to Wall Street, but said Avery may be ready to expand after cutting costs.

"My first reaction is that the deal probably makes sense for Avery," she said.

An Avery executive indicated that Dennison, based in Framingham, Mass., will continue its current operations. "We're expecting to maintain the Dennison business as is," said Diane Dixon, vice president of corporate communications.

But Dixon said no final decision has yet been made on whether the deal will result in any job cutbacks. Company headquarters will remain in Pasadena.

Nelson S. Gifford, Dennison's chairman and chief executive officer, will be vice chairman of the merged company. The new company will be headed by a 16-member board with four members of Dennison's board, including Gifford, joining the 12-member Avery board. The agreement calls for Dennison shareholders to receive 1.12 shares of Avery stock for each share of Dennison. Dennison has about 16 million common shares, of which more than 20 percent is held by directors, officers and the employee stock ownership trust. Miller said Avery's management plans to recommend to the new board an increase in the quarterly dividend to 18 cents a share from the current 16 cents a share following the completion of the merger.

Investors, apparently believing the deal represents a considerable premium for the Dennison shares, reacted quickly to announcement, with Dennison shares soaring $18.25 to $27.25 after the Avery-Dennison deal was announced.

Dixon said the movements in stock price were not unexpected. "We feel our price is very fair," she said. "We know Dennison pretty well."

Dixon also said that the two companies nearly agreed to merge three years ago, then resurrected such discussions recently.

In 1987, Avery dropped two unrelated divisions, closed five U.S. plants and two plants in France and absorbed a $25 million restructuring cost. Analysts have said that since then, Avery has been fine-tuning its operations to boost profit margins.

It reported 1989 earnings of $86.5 million on sales of $1.73 billion, increases of 11 percent and 10 percent, respectively, over the 1988 figures.

Avery has more than 150 manufacturing plants in 25 countries with 11,700 employees and assets of $1.14 billion.

Dennison's earnings last year were off sharply, to $29.1 million from $37.2 million, although sales were up to $770.9 million from $721.8 million. Its assets total $554 million.

Dennison spokeswoman Linda Sadowski said last year's decline in profits stemmed from restructuring costs involving consolidation of its office products division, capital investments and the soft domestic economy. Dennison operates 47 manufacturing and distribution plants in 15 countries and has 7,500 employees.

As part of the deal, Dennison has granted Avery shareholders an option, exercisable under certain conditions, to purchase new shares of Dennison amounting to 20 percent of the present outstanding shares.