Did Avon Give Away Its North American Business?

Avon Products Inc. (NYSE: AVP) announced Thursday morning that the company has received $605 million in two investments from affiliates of private equity firm Cerberus Capital Management. Cerberus is paying $435 million for convertible perpetual preferred equity in Avon Products and $170 million for an 80.1% interest in Avon North America. The convertible equity is priced at $5 a share and equates to a 16.6% share of Avon Products’ stock, assuming the preferred shares are converted to common stock.

In April of this year, Avon’s stock bounced higher on talk of a pending investment. Nothing came of it and the stock soon resumed what has become a 12-month slide of nearly 53% in the share price. Shares bounced nearly 13% at the opening bell Thursday morning, but think about what just happened.

Avon has essentially sold 80% of its North America business for $170 million, valuing the entire business at around $212.5 million. The North American products business will become a separate, privately held company.

Since cosmetics firm Coty Inc. (NYSE: COTY) came public in mid-2013, its shares have added about 60% and Avon shares have lost around 80%. In 2012 Coty offered to buy all of Avon for something north of $10 billion. Avon rejected the offer as inadequate. Coty should count its blessings.
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Last May a hedge fund investor told the New York Post, “All in all, I don’t see a deal happening unless Avon basically gives away its North American business for essentially nothing.” That appears to be what has happened.

Avon’s stock traded up more than 6% early Thursday morning, at $4.34 in a 52-week range of $2.41 to $9.68. The consensus price target on the stock is $4.77.