The first sign of a possible turnaround came from Citigroup late last month. Citigroup upgraded the company to a “buy” recommendation, with a target price of $5. It said Avon will “likely articulate some long-awaited plans to fund reinvestment in the business to reaccelerate more profitable growth.” The day before Citigroup made this announcement, Avon shares had closed the day at a price of $2.85. So, Citigroup’s expectation was that the share price would gain over 75%.
Talks Between Avon and Cerberus Capital
Then early this month, came the news about Avon’s intentions to sell its North American business. The candidate buyer was a private investment firm, Cerberus Capital Management. Cerberus, known for investing in distressed companies, does not have a direct selling company in its portfolio. This gave Avon shares another boost and it peaked at $4.50, coming close to Citigroup’s initial target price (Citigroup increased the target price to $6 afterwards). As part of the deal, Cerberus would make an investment in Avon that would strengthen the company’s finances.
Opposition From Investors
On the other hand, immediately an opposition came to this possible deal from “Barrington Group”, a group of institutional investors that act together. This group ownes more than 3% of Avon’s stock. Barrington Group sent a letter to the Chairman of Avon. After summarizing the decline in Avon’s overall business that continued under the new top management, they said they had hopes for a turnaround. And to make this happen, they had a plan that if implemented, would:
* Eliminate “wasteful expenses” to make a saving of $500-700 million per year,
* Grow revenue and market share,
* Set the company on a path to recovering its position as a leading global beauty brand,
* Value Avon’s stock at approximately $14.50 which is way above at the price Avon share is trading these days and even the target price that Citigroup had announced.
Among the reasons responsible for Avon’s current situation, Barrington Group included the “poor choice of a new CEO”, pointing the current CEO Sheri McCoy.
The group says Avon can still fix its business and does not need private equity. It also opposed Cerberus’ investment in Avon, saying the private equity firm was getting shares in the company at a “fire sale” price. The group is also said to have plans to submit candidates to Avon’s board at the next annual meeting in spring next year. It already had said, “We are convinced that the addition of new independent directors to the Board is a necessary first step.”
Avon’s North America
One might wonder what the North American unit means for Avon. In 2014 and 2015, North America represented 14% of Avon’s global revenue. In 2008, though, its share was 23%. So, while Avon was going down, North America has gone down faster. Plus, among Avon’s four regions, it is only one that generates an operating loss. In a recent article on Fortune, the five reasons behind this decline were listed as:
* The rise of affordable quality beauty products
* Inadequate computer systems
* Coming late to e-commerce
* Commission structure
* Being late to the Hispanic market
Avon’s downfall in the last few years has not yet stopped globally. Each and every year closed with figures worse than the previous one. You will see on the below chart, Avon’s revenue and profit evolution:
This would all be reflected on the stock value that means company’s valuation at the end of the day. In mid-2008, Avon share was valued at $45 and now, Citigroup gives a target at $6 with a “buy” recommendation. While Avon was valued at over $19 billion in 2008, this has come down to less than $2 billion now.
The Deal Is Confirmed
Last week on December 17, Avon announced the details of the deal with Cerebrus. According to this,
* Cerberus will invest $435 million in Avon,
* Avon’s North America business will be separated from Avon into a privately-held company managed by Cerberus,
* Cerberus will own 80.1% of Avon North America (i.e. U.S., Canada, and Puerto Rico),
* The new company will enter into a licensing agreement with Avon for the use of the Avon brand,
* Steve Bosson, VP Finance at Avon North America will lead Avon North America transition team,
* Pablo Munoz, current President of Avon North America, will be leaving the company effective January 4,
* Cerberus will appoint a CEO of Avon North America,
* Cerberus will have three seats at Avon’s Board of Directors,
* Current Avon Chairman Douglas Conant will be replaced by Chan Galbato from Cerberus Group.
An interesting outcome of this deal is that Avon will be a company based in the U.S., publicly traded in the U.S. with little or no business in the U.S.
Avon announced it would hold an “Investor Day” on January 21, 2016. The meeting as the company said, would feature presentations from the company’s executive team on Avon’s growth and investment strategies, cost and capital structure, and outlook.
Will this deal help Avon stand on its own feet and rise? We will all have to wait and see.