By and  on July 12, 2010

Avon Products Inc. is at it again.

The direct seller stepped up its acquisition spree by purchasing jewelry company Silpada Designs Inc., a direct seller with operations in the U.S., Canada and the U.K., for $650 million.

The purchase is Avon’s third this year — after a 13-year hiatus from acquisitions. It follows two smaller-sized buys, the premium natural skin care range Liz Earle and the trademark of baby care line Tiny Tillia. The all-cash transaction is expected to close in the third quarter.

Avon chairman and chief executive officer Andrea Jung has made her interest in jewelry known in recent months, suggesting that the category offers an opportunity to polish the company’s image and style authority.

“We’ll be more intense on our growth drive for jewelry and accessories worldwide,” Jung told WWD Beauty Biz in June. “The U.S. has a large business in those categories, but we’re underpenetrated worldwide. That’s something we’ll be expanding.”

She also hinted that more acquisitions were possible.

“Close to the core acquisitions are definitely something we will look at very closely,” Jung said. “We have such a great global footprint, so we’re looking for businesses we can perhaps take global.”

The $10.4 billion company has played in the jewelry business before, acquiring Tiffany & Co. in 1979 to add luster to its image. The union was short-lived and Avon sold Tiffany’s in 1984.

This time, the move is more strategic, experts said. Silpada’s assortment of sterling silver jewelry — priced between $12 and $279 — is sold by a network of 32,000 independent sales representatives, mostly through a party-based model. Avon said Silpada will continue to operate as a stand-alone business, and the jewelry firm’s representatives will be the exclusive sellers of the product.

Avon’s sales force could apply to be Silpada representatives, as well. Asked whether Silpada would design a lower-priced line for Avon, which sells a smattering of jewelry for less than $25, a company spokeswoman said, “There are no immediate plans to cross-pollinate [merchandise].”

The transaction will be structured as an all-cash, asset acquisition. Under the agreement, Avon is expected to acquire the assets of Silpada for an initial payment of about $650 million, and will make a potential additional payment in early 2015 to the current Silpada shareholders if certain earnings growth targets are achieved.

Avon plans to retain the entire management team, including Silpada’s founders, Bonnie Kelly, Teresa Walsh and Jerry Kelly, who will continue to operate the company from its headquarters in Lenexa, Kan. The privately held firm, which was founded in 1997, has annual revenues of about $230 million and is expected to significantly improve Avon’s operating margins. Deutsche Bank analyst Bill Schmitz said, based on 2009 figures, the acquisition boosts Avon North America’s operating margin by 170 basis points.

Silpada ceo Jerry Kelly will report to Chuck Cramb, Avon vice chairman and chief finance and strategy officer. The company’s results will be consolidated with those of Avon’s North American business unit.

“We began thinking several years ago about the future and how we could ensure Silpada’s ongoing viability, strength and growth,” Kelly said. “We looked to the future, and thought of who would be the perfect strategic partner and who knew direct sales…[and] knew how to support and grow a brand, companies that had experience internationally and had a culture and values and mission similar to our own. Only one company came to our mind that fit the criterion, and that was Avon.”

While all three of Avon’s recent acquisitions are relatively small in size, the company’s strategy to continue to operate Liz Earle as a direct-to-consumer business and run Silpada as a separate company has raised questions.

“The deal increases Avon’s exposure to noncore businesses [beauty is approximately 80 percent of worldwide revenue and about 60 percent of U.S. revenue] and is expensive, in our view,” Stifel Nicolaus analyst Mark Astrachan wrote in a research note Monday. “Additionally, Silpada will operate as a stand-alone business, including no cross-selling into respective catalogues and minimal, if any, cost synergies.”

Caris & Co. analyst Linda Bolton Weiser acknowledged the deal may not offer an abundance of cost synergies, but said the learnings will be great. For example, she said, Tupperware Brands Corp. has improved its performance over the last five years by operating separate brands and business models around the world.

Bolton Weiser said once Silpada’s revenues are included in Avon’s North American business unit they will account for 10 percent of the division.

“It’s a good way to add a higher growth rate to North America,” she said. She added that, since 2004, Silpada has had a compound annual growth rate (or year-over-year growth rate) of 27 percent. “It shows that the party [direct selling] method is not dead.”

Centerview Partners LLC acted as financial adviser and Sullivan & Cromwell LLP acted as legal adviser to Avon. Lazard Middle Market LLC acted as financial adviser and Lathrop & Gage LLP acted as legal adviser to Silpada.

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