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 (VWAP). Assuming the conversion of the preferred stock to common stock, this equates to an ownership interest of approximately 16.6% as of December 16, 2015.
Avon North America will be separated from Avon Products into a privately-held company majority-owned and managed by Cerberus. 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 the Spring of 2016.
According to Cerberus, the strategic partnership will:
• Position the international business for accelerated growth in beauty and direct selling and create greater earnings opportunities for representatives;
• Improve cost structure and operational efficiencies to deliver long-term value to shareholders;
• Increase financial flexibility and improve the capital structure to support the international portfolio; and
• Provide ongoing equity ownership in Avon North America so that Avon Products shareholders benefit from future value creation in that business.
"After a thorough, thoughtful and deliberate process by both parties, we are creating a strategic partnership that will improve Avon's performance and drive shareholder value," said Sheri McCoy, chief executive officer of Avon Products, Inc. "We believe this partnership and structure will also accelerate profitable growth in the remaining Avon portfolio – which represented approximately 86% of consolidated revenues for the nine months ended September 30, 2015 – as we focus resources on our top markets, the majority of which are profitable and growing. The capital infusion from Cerberus, alongside the suspension of the dividend, and additional operating efficiencies provide us the needed financial flexibility to implement operational and capital plans that fully support the international business," continued McCoy. "We look forward to sharing the Avon growth plan at our investor day in January."
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.
"Importantly, Cerberus has both the conviction and resources to support our representatives," said McCoy. "We are confident that relief from the short-term pressures of a public company reporting cycle, the substantial investment that Cerberus is making to support and reinvigorate the business and the operational excellence and discipline that define Cerberus' reputation, will return Avon North America to health. With our continuing ownership position, we look forward to helping advance the Avon mission in North America, while allowing our shareholders to participate in the upside potential."
"We have long admired the Avon brand, business model and products and see significant potential for Avon both in North America and internationally," said Steven F. Mayer, Senior Managing Director and Co-Head of Global Private Equity of Cerberus. "We are strong believers in the direct selling model, the principle of empowering Representatives, and the growth that direct selling can generate when Representatives are appropriately supported and incentivized to build their businesses. By privatizing the North American business, we will have the time and ability to improve the company's competitiveness, enable each Representative to earn more, help her conduct business more efficiently, and increase her customers' satisfaction."
But not everyone was pleased with the move.
James A. Mitarotonda, chairman and CEO of Barington Capital Group, L.P., stated "Cerberus clearly recognizes, like us, that Avon is an extremely valuable brand. The Avon board apparently does not—it has sold 80% of its North American business and a 16.6% stake in the Company at what we believe are “fire sale” prices. While we are pleased that six existing board members have agreed to step down, we are astonished that Sheri McCoy remains as CEO. We intend to explore all available options."
Meanwhile, in a note to investors, Citigroup’s Wendy Nicholson and Beth Kite said Avon left value on the table in this deal and contended that management could have tried other things before giving up the ship.
"Indeed, we think there are some strategic alternatives for the US market that might have led to a stabilization of the revenues and increased profitability for the business," they wrote.
The analysts said Avon should have tried selling products on Amazon and other websites, including avon.com, which would have leveraged brand equity and enabled current Avon customers to continue to purchase the products, but would have eliminated the cost of running an expensive and deteriorating direct selling network. Or, they suggested, Avon could have tried selling product on QVC or Home Shopping Network, which has been a very high margin distribution channel for other beauty brands.
"While we suspect Cerberus might indeed try some of these options, and we will be curious to see how they play out, our over-riding disappointment is that we think Avon could have done more to extract greater value from this asset," wrote Nicholson and Kite. "While there is some consolation that Avon is maintaining a ~20% stake in the U.S. business, and therefore could share in the upside of any recovery in this business, we also worry that the splitting of the Avon brand under effectively two owners introduces an element of risk, for the ways in which Cerberus might try to change the positioning of the brand or its go-to-market strategies could in fact impact the international markets that now represent the future of the Avon business."
The analysts concluded that part of their hope that the US business would recover was pinned on their belief that if Avon were to have a stable business at home, this might over time smooth-out some of the volatility associated with such a large and historically lumpy emerging market business (both in local currency terms and even more so in reported terms).
"All in, we think Avon made a mistake in giving up on and/or getting out of the US in this fashion and at this time," they concluded.