Jafra Sale to Avon Falls Through

Clayton Dubilier & Rice, a large buyout firm, was in advanced talks to sell its Jafra Cosmetics unit to Avon Products until about two weeks ago, but the deal fell apart, people familiar with the talks said on Thursday.

Jafra, which announced a $275 million recapitalization on Wednesday after the talks collapsed, was set to be sold for between $350 million to $400 million, according to the sources, who requested anonymity. But Avon backed off at the last minute for unidentified strategic reasons, they said.

The recapitalization allows Westlake Village, California-based Jafra to repay debt under an existing credit facility and pay investors in Clayton Dubilier & Rice Fund V, which owns 84% of the cosmetics distributor.

According to Moody’s Investor Service, CD&R investors will get a $154 million distribution under the recapitalization plan. Jafco plans to issue $175 million in bonds due 2011 and arrange $100 million in bank loan facilities.

Spokespeople for Avon and CD&R declined to comment. Jafra officials could not be reached for comment.

Buyout firms like CD&R typically buy, upgrade and sell mostly private companies in a three-to-five year timeframe, using money raised from pension fund investors and others. CD&R bought Jafra in April, 1998 from Gillette Co. for $200 million.

The Jafra sale process had gone through fits and starts since last year, with several private equity and strategic buyers looking at it. But talks stalled in November, prompting sellers to plan a recap, the sources said. Talks with Avon were revived then, only to collapse earlier this month, they said.

CD&R had hoped to get up to $600 million for the unit, the sources said. Merrill Lynch & Co. advised CD&R. Jafra is a smaller competitor to Avon and Mary Kay selling cosmetics directly to consumers through a network of salespeople. Some 66%of sales are in Mexico, with the rest in the United States and Europe, according to Standard & Poor’s.