Photographer: Scott Eells/Bloomberg

Overhaul of Avon U.S. May Be Better Than Selling the Unit

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Avon Products Inc., which is exploring a sale of its North American operations, may be better off just giving the unit a makeover.

Shares of the door-to-door cosmetics seller jumped 14 percent Tuesday after people familiar with the matter said it’s considering options for the division including a sale. The problem is, the unit is losing money -- so much so, that Avon is likely to get less for the unit than the business generated in revenue last year, according to analysts’ estimates. That’s assuming there would be any buyers, which may not be easy to find, said Ali Dibadj of Sanford C. Bernstein & Co.

Moving away from the direct-selling model toward licensing or distributing the North American beauty brand for sale at retailers such as Wal-Mart Stores Inc. instead may ultimately offer more upside, he said. Avon could slash its manufacturing and commission costs, and the business could become profitable again, Dibadj said.

“To monetize the North American business, the best thing to do would be to license the brand out,” Dibadj, a New York-based analyst, said in a phone interview. “If you can sell it, and someone is willing to be a buyer of a dilapidated business, then that’s great. I think it’s going to be difficult.”

The direct-selling model has lost some of its appeal in the U.S. as specialty beauty shops such as Sephora have grown in popularity. Avon has also struggled to innovate at the same pace as some of its peers and retain new representatives, said Stephanie Wissink, a Minneapolis-based analyst at Piper Jaffray Cos.

More Profitable

Going the retail route would be 11.8 percent accretive to Avon’s 2015 earnings per share, versus 6.7 percent for a sale of the North America unit, according to estimates from Stephen Powers, a New York-based analyst at UBS AG.

“Selling the business in North America is not necessarily a game changer,” Powers said by phone.

Avon shares fell 1.6 percent to $8.80 on Thursday in New York.

A representative for New York-based Avon said the company had no comment.

Remaking the North American operations would present its own set of challenges for Avon. For one, it would require money that the company doesn’t necessarily have. Avon had about $960 million in cash at the end of December and about $750 million in debt payments are coming due over the next few years. Divesting the money-losing business could free up Avon to focus on its other geographies and fund improvements there, Piper Jaffray’s Wissink said.

The alternative to all of this is to sell the whole company. Avon has been the subject of takeover speculation since it rejected advances from Coty Inc. in 2012 and subsequently lost half its market value. Private-equity firms are Avon’s best shot at a takeover, but the size of the deal and the complicated turnaround that would be required could be off-putting, Wissink said.

“The question remains if it’s too little, too late,” Dibadj at Bernstein said.

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