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Avery's Uncredited Role in U.S. Suit

Firm concedes it is the unnamed entity said by government to be trying to limit competition.

April 17, 2003|Debora Vrana | Times Staff Writer

Executives of Avery Dennison Corp. said Wednesday that it was the unnamed company accused in a federal antitrust lawsuit of working with a smaller rival "to limit competition" in the label-making industry.

The lawsuit, filed by the Justice Department on Tuesday in federal court in Chicago, seeks to block the union of two of Avery's biggest competitors in the market for unfinished adhesive labels, known as label stock.

The suit doesn't name Pasadena-based Avery Dennison, referring only to "the leading producer" in the North American label stock business. But Avery Dennison Chief Financial Officer Dan O'Bryant said that producer was clearly Avery, the industry leader, with about 50% of the market.

Avery's shares fell 6% on Wednesday to $52.50, down $3.44, after hitting a 52-week low of $51.80 on the New York Stock Exchange. The shares have declined 13% in the last two days, wiping out about $843 million in market capitalization since Avery announced late Monday that it expected a subpoena in a federal probe of anti-competitive practices in the label stock industry.

The federal lawsuit aims to stop a proposed $420-million acquisition of MACtac, a subsidiary of Minneapolis-based Bemis Co., by UPM-Kymmene of Finland.

UPM, which has been increasing its presence in the U.S. market for label stock, currently sells some label stock to Avery but also competes with the U.S. company in many of the same global markets where Avery is active.

According to the suit, the relationship between UPM and "the leading producer" has given the two firms "the motivations, opportunities and means to coordinate on price, monitor adherence, punish cheating and engage in side payments."

The suit alleges that in June 2001, in response to complaints from the larger company about UPM's aggressive competitive behavior, a senior UPM executive wrote a note to a senior manager at "the leading producer." The executive proposed that the two work to keep a "balanced market" that would "benefit both the customers and suppliers," the suit said.

"I think it is the role of the big players to be extremely careful to avoid major instability," the UPM executive wrote, according to the suit.

The Justice Department wouldn't comment Wednesday. The agency has confirmed that it has launched a criminal investigation of the label-making industry, though it hasn't identified the companies targeted.

Avery is not a defendant in the antitrust suit in Chicago, and no charges have been filed by the Justice Department against the company.

O'Bryant, Avery's CFO, said that the firm took the situation "seriously" and that "we continue to cooperate" with the Justice Department.

He added, "We feel the conversations we've had with UPM have been appropriate customer-supplier conversations and we haven't been accused of anything inappropriate there."

Label stock is sold in large rolls to companies that use it to make self-adhesive or pressure-sensitive labels for a broad range of products.

Avery offers other label products and had $4.2 billion in sales last year, employing 20,500 people in 39 countries

The federal suit contains "pretty serious allegations," said Ghansham Panjabi, an analyst who follows Avery for Lehman Bros.

Panjabi, who has a "hold" rating on the stock, said he will be revisiting his outlook for the company.

"Avery's a pretty well-respected company," he said.

Jeffrey Zekauskas, an analyst with J.P. Morgan who has a "neutral" rating on Avery stock, said given "the high market share concentration among UPM, MACtac and Avery in the North American label-stock market, it is not surprising that the Justice Department would file suit to challenge the transaction."

Institutional investor Todd Sullivan, a senior vice president at Santa Barbara money manager Starbuck-Tisdale, which owns 300,000 shares of Avery stock, said he didn't sell any Avery shares Wednesday.

"Anything like this I think is disconcerting at first, but we're going to see how it plays out," he said.

UPM didn't return a call for comment Wednesday.

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