Avon to Separate Its North America Business in Cerberus Deal

  • Private-equity firm to invest $605 million in cosmetics giant
  • Cerberus will own 80% of North American unit after transaction

Avon Products Inc. will split off its North American business as part of a $605 million deal with private-equity firm Cerberus Capital Management, letting the beleaguered cosmetics giant focus on its more promising international business.

Cerberus will acquire an 80 percent interest in the North American division for $170 million, according to a statement Thursday. That business, which has struggled to attract new sales representatives, has been a drag on the company. Operating income in the unit has fallen four years in a row, including a 14 percent decline last year.

The move follows reports earlier this month that Avon was close to selling the North American business -- a deal that drew concern from some investors. A shareholder group led by Barington Capital Group urged Avon to pursue a restructuring plan instead, rather than unloading its North American division at a “fire sale” price. Barington reiterated those concerns on Thursday. Investors initially seemed satisfied with the deal, sending the shares up as much as 17 percent, but the stock ultimately fell 1.5 percent by the close of the market.

As part of the Cerberus agreement, the investment firm will make a $435 million investment in the parent company. It will take the form of convertible preferred stock with a conversion price of $5 a share. That price is a 46 percent premium to the 30-day volume-weighted average and would equate to a stake of 16.6 percent, according to the statement.

The North American business will assume about $230 million in long-term debt from the parent company, which will contribute $100 million in cash to the new entity.

Unusual Approach

The approach -- having a buyout firm take part of a company private and acquire a significant stake in the rest -- is novel, according to Carol Levenson, an analyst at Gimme Credit LLC.

“Hiving off one region of such an interconnected business seems the opposite of synergistic,” she said in a note to clients. “But perhaps the hope is that if Cerberus can turn around North America, it could set a pattern for turning around the rest of the world.”

Dividend Suspended

The company also suspended its quarterly dividend, saying it would reinvest that money in the business. Avon is on track for its fourth straight year of sales declines, hurt in part by a consumer shift in North America. Fewer customers there are buying products from door-to-door salespeople -- Avon’s hallmark. Shedding the domestic business will make it easier for the company to grow profitably overseas, said Avon Chief Executive Officer Sheri McCoy. Avon will use about $250 million from proceeds to pay down debt.

The shares fell to $4.03 at the close in New York Thursday. Even after the deal discussions sparked a rally in recent weeks, the stock has still lost more than half its value this year.

Avon also is shaking up its board as part of the deal, with Cerberus bringing on several directors. The total number of board members will shrink to 11 from 12. Half the current members, including Chairman Douglas Conant, will step down.

“The separation of Avon North America is the best way to ensure that both businesses have an unencumbered path to profitability and growth,” McCoy said. “This was a key principle as we considered alternatives.”

Barington, meanwhile, voiced reservations about the deal.

“Cerberus clearly recognizes, like us, that Avon is an extremely valuable brand,” Barington CEO James A. Mitarotonda said in a statement. “The Avon board apparently does not -- it has sold 80 percent of its North American business and a 16.6 percent stake in the company at what we believe are ‘fire sale’ prices.”

The firm, which was previously called for management changes at Avon, said it would explore “all available options.”

“While we are pleased that six existing board members have agreed to step down, we are astonished that Sheri McCoy remains as CEO,” Mitarotonda said.

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