Avon Products Inc. AVP recently penned a deal with New York-based private investment firm – Cerberus Capital Management. The move reflects Avon’s attempts to revive its North American operations, increase focus on global markets and generate long-term value for its stockholders.
Per the deal, Cerberus Capital will buy an 80.1% stake in Avon North America for an equity investment worth $170 million. Consequently, Avon North America will be separated from Avon Products into a privately-held business spanning the U.S., Canada, and Puerto Rico. The latter will also include long-term liabilities from Avon Products of roughly $230 million, to be partly compensated by a $100 million cash contribution from Avon.
Following the separation, Cerberus Capital will direct the privately held firm, with plans to immediately start investing in its marketing and Representative recruitment; ramp up product portfolio and simplify the unit’s operations, all aimed at operational enhancement. Cerberus also intends to undertake strategies to strengthen Avon North America’s active Representatives and increase earning opportunities for them, via different programs.
Further, the separated company will enter into a licensing deal with Avon Products, for the use of its brand, intellectual property and brand portfolio. Also, a transition services agreement is slated to take effect, involving IT and Research and Development.
Apart from this, Cerberus Capital will purchase a minority stake in Avon Products, for $435 million. This will be funded via convertible perpetual preferred stock.
The aforementioned transactions are expected to close in Spring 2016. Avon anticipates incurring about $325–$425 million pre-tax loss on account of the sale of its North American operations. The company also declared the suspension of its quarterly dividend, effective in the first quarter of 2016. Shares of the company slipped 1.5% following the announcement.
Avon intends to utilize the sale proceeds and benefits from dividend suspension to partly offset the transferred liabilities, reduce debt load and for restructuring of the business. Further, the company reiterated its operational performance outlook for 2015.
With regard to some significant management changes, Pablo Muñoz – the existing President of Avon North America will exit the company on Jan 4, 2016, and Cerberus will appoint a new CEO for the segregated company. Also, Steve Bosson will be leading the Avon North America transition team.
Avon, which carries a Zacks Rank #5 (Strong Sell), has been gradually losing its momentum due to continuous loss of active representatives, declining volumes, unfavorable foreign currency translations and reduced margins in mature markets like North America.
As for Cerberus Capital, it invests in businesses where it mainly specializes in enhancing the operating performance and creating long-term value. Hence, we think that its strategic partnership with Avon will likely improve the latter’s cost structure, provide it with greater financial flexibility and enhance capital structure, increase operational efficiencies and place it well for global growth.
Stocks to Consider
A better-ranked stock in the same industry is The Estée Lauder Companies Inc. EL, with a Zacks Rank #2 (Buy). Other favorably ranked stocks in the related industry include Regis Corp. RGS, with a Zacks Rank #1 (Strong Buy) and ULTA Salon, Cosmetics & Fragrance, Inc. ULTA, with a Zacks Rank #2.
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