Consumer

Brooke Sutherland is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

Avon is finally getting a little help from a private-equity firm, but it could have come on better terms if the company had done more to help itself first.  

The struggling door-to-door cosmetics seller announced on Thursday that it's selling an almost 17 percent stake in itself and the bulk of its North American division to Cerberus Capital Management for a total of $605 million. The deal caps years of speculation about the fate of Avon after Coty walked away from an $11 billion takeover offer in 2012.

Cerberus's stake in Avon -- made via a $435 million investment in the form of convertible perpetual preferred stock -- implies a potential market value for the company in the range of of $2.5 billion. The stock has a conversion price of $5 a share, and while Avon was trading above that level as recently as August, analysts didn't see it getting back there on its own any time soon. Some saw the shares trading in the $3 range or below over the next year. So, hooray?   

As depressing as that sounds, Avon holders are probably happy with whatever help they can get at this point. The company's revenue is projected to decline 19 percent this year, the biggest of four straight annual slumps. Before news of the Cerberus transaction, Avon shares were down 56 percent year to date. No personal goods company of a similar size is cheaper.

Not Very Pretty
Avon has lost more than $10 billion in market value over the last five years as its shares slumped.
Source: Bloomberg

Cerberus' investment will provide Avon with the money it needs to help fund a turnaround and bring back growth. The buyout firm responsible for taking over the grocery chain Albertsons and merging it with Safeway has experience in that department. 

But imagine the price Avon could have commanded if its turnaround had been more successful -- or it had realized sooner that there was too much damage to fix on its own.  Of course, some things were somewhat out of Avon's control, like the  currency fluctuations and new industrial production tax in Brazil that have plagued its business there of late. But the company could have done more to address its bloated cost structure and been more willing to let go of North America and the direct-selling model.

Despite thousands of job cuts and other cost slashing, Avon still has one of the slimmest operating margins among big personal goods makers. A decent chunk of the savings was mopped up by a bill of about $500 million to clean up bribery charges. Activist investor Barington Capital said earlier this month that a further $700 million in savings was possible through additional cuts.

Sliding Sales
Avon is poised to report its fourth straight annual revenue decline.
Source: Bloomberg

The North American business, meantime, has been a thorn in Avon's side for a while now. It hasn't made money in years. Yet even as CEO Sheri McCoy exited underperforming markets such as Ireland, she called the U.S. business ``an important part of our portfolio'' in 2013, despite entreaties from analysts to sell the business. Yet revenue kept dropping.

Back in April, when a divestiture of the struggling business finally looked to be on the table, analysts said the better option for unlocking value would be to abandon direct selling. The model has fallen out of favor in the U.S. as specialty beauty shops and makeup subscription services such as Birchbox have grown in popularity. Licensing or distributing the beauty brand for sale at retailers such as Wal-Mart Stores would allow Avon to drastically cut costs and return to profitability.

But Avon never committed to the retail route, instead striking this deal with Cerberus in which the private-equity firm will pay a mere $170 million for an 80 percent controlling stake in the North American operations -- a fraction of the roughly $1 billion in sales for that geography over the last year.

Perhaps McCoy was simply too attached to her army of door-to-door sale representatives to do more than just put Band-Aids on the struggling business. The Wall Street Journal quoted the CEO as saying that when times are tough, she remembers the many women around the world who rely on Avon for their livelihood, and feels ``extremely responsible" for them.

In that respect, a private-equity firm may be better suited to run the North American operations. Steven Mayer, co-head of global private equity at Cerberus, said in a statement announcing the deal that he and his firm are ``strong believers in the direct-selling model." We'll see how long that faith lasts.

What's curious is that McCoy will remain CEO of the parent company. The former Johnson & Johnson executive inherited an admittedly big mess from ex-head Andrea Jung. Still, McCoy will need to show she's willing to be more aggressive with improving the international operations than she was with the North American business or her days may be numbered. Activist investor Barington is already making some noise about this. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Brooke Sutherland in New York at bsutherland7@bloomberg.net