Avon sells north american operations to Cerberus

After weeks of speculation, Avon North America will be separated from Avon Products into a privately-held company that will be majority-owned and managed by Cerberus Capital Management, a private equity firm.

The move was initially cheered by investors, but Avon’s share price dipped later in the day as industry observers suggested the Avon board didn’t get enough for its North American business.

Cerberus will make a $435 million investment in Avon Products. This investment will be in the form of convertible perpetual preferred stock with a conversion price of $5.00 per share and a dividend that accrues, or is payable at Avon’s option under certain circumstances in common shares or cash, at a rate of 5% a year.

The conversion price represents a 46% premium to the 30-day volume-weighted average price. Assuming the conversion of the preferred stock to common stock, this equates to an ownership interest of approximately 16.6% as of Dec. 16, 2015.

Cerberus will purchase an 80.1% interest in Avon North America in exchange for a $170 million equity investment.  Avon North America will also assume approximately $230 million of long-term liabilities from Avon Products, which will be partially offset by a $100 million cash contribution from Avon. The transaction is anticipated to be completed in Spring 2016.

CEO Sheri McCoy insisted that there is “high potential” for the Avon brand and business model in both its international business and Avon North America. She insisted that the separation of Avon North America is the best way to ensure that both businesses have an unencumbered path to profitability and growth and this was a key principle as the board considered alternatives.

For the third quarter, Avon’s sales plunged 22% to $1.7 billion. Total units decreased 6%, driven by declines in Latin America and North America. Beauty sales declined 23%.