Avon Surges on Report Cerberus Is Buying North American Unit

4 Dec 2015 | Author: | No comments yet »

Avon Investor Barington Urges Company to Avoid `Fire Sale’ Deal.

Avon Products AVP 8.85% is nearing a deal to sell its long ailing North American business to private equity but the plan, which would give the 130-year old beauty products company a much need financial shot in the arm, is being challenged by a group of activist investors with their own ideas on how to turn the direct-seller’s business around. The shareholder, which is leading a group that includes NuOrion Partners AG and other investors, said Avon is significantly undervalued and in need of new leaders, according to a statement on Thursday. Barington intends to nominate a slate of director candidates for the 2016 annual meeting, giving it sway over the board. “Avon’s 6 million sales representatives, the backbone of Avon, deserve a senior management team that can reinvigorate the company and introduce new products and marketing campaigns that will resonate with customers,” Barington said in the statement, which was sent to the board of Avon.

As part of the discussions, Cerberus is expected to buy a minority stake in Avon and may receive seats on the board, according to these people, who were not authorized to speak publicly. Avon’s sales in North America have fallen by more than half since 2007, an all-time high, and there has been a fast exodus of the sales representatives–the iconic “Avon Ladies”–Avon relies on. In addition to pushing for management changes, Barington wants the company to cut expenses, a move that it says would bring as much as $700 million in annual savings.

A deal could be reached before year-end, though one of the people cautioned that negotiations over the complex proposed transaction are continuing and might still fall apart. The company has struggled to compete with the emergence of affordable, quality cosmetics brands like Sephora and specialty stores like Ulta Beauty ULTA 6.15% and vastly improved beauty offerings of retailers from Walgreens to Target TGT 1.75% , not to mention trying to adapt to keep direct-selling relevant in today’s world. Avon also should invest in operational improvements and increase its dividend, according to the investment firm, which said its group collectively owns more than 3 percent of the beauty company.

Should the two sides strike an agreement, it would bring Avon a prominent backer at a time the famed cosmetics maker has sought to revive its business. The company’s most famous holding is perhaps Remington Outdoor, the gun manufacturer that made the weapons used in the Sandy Hook and the San Bernardino shootings.

The report renewed optimism that investors may be able to wring some value from Avon shares, which have been pummeled by three years of losses and the waning effectiveness of its door-to-door sales model. The private equity firm is no stranger to retailing, having invested in stores like Safeway and Albertsons, the two supermarket chains it eventually merged and took public. Instead, she has failed to stanch the sales bleed in the U.S., once Avon’s top market, while its competitive position in emerging beauty markets like Brazil is eroding.

Since then, Avon’s shares have slid some 80 percent, giving it a market value on Thursday of roughly $1.6 billion, as it faced declining volumes and shrinking market share within the beauty industry. Meanwhile, its dwindling sales have led to credit downgrades: as of September, Avon had more than $2 billion in debt and only about $600 million in cash.

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