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Natura to Acquire Avon, Officially

The deal could get both companies back to a leading position in Brazil, writes one Wall Street analyst.

Natura Cosméticos SA has officially made an offer to take over Avon Products Inc.

On Wednesday, Natura said the parties had reached a deal to merge with Avon. Under the terms of the transaction, Natura would create a new holding company for the combined business, called Natura Holding SA, which would own both Natura and Avon. That business would be owned by shareholders of both companies, with Natura shareholders owning 76 percent and Avon shareholders holding 24 percent of the company.

According to Natura, the deal would make the business the fourth largest pure-play beauty company in the world with more than $10 billion in annual gross revenues.

Avon had confirmed that the companies were in advanced deal talks for an all-stock transaction earlier on Wednesday, after The Financial Times issued a report that Natura was in talks to acquire the business at a valuation of more than $2 billion.

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With Avon, Natura is taking on another project of a business. The Brazilian direct seller has been working to turn around The Body Shop since it bought it from L’Oréal in 2017, and Avon would also require work. Natura also owns Aesop.

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The Avon business has struggled in recent years, and posted $3.75 billion in net sales for calendar 2018, down about 10 percent from the prior year.

The company spun off its North America operations in 2016, selling a majority position to private equity firm Cerberus Capital Management and intending to focus on its larger international markets. The North America division was especially troubled, and continued to struggle under new ownership. LG Household & Health Care said it would buy the business for $125 million back in April.

The international business, dependent on markets like Brazil, Russia and the Philippines, has worked to modernize through initiatives like digital brochures and electronic training programs under Jan Zijderveld, who took the helm as chief executive officer in early 2018. But the company’s numbers for active representatives continue to dip.

Skeptics of the business say the traditional direct-selling model simply does not work anymore.

Other companies, like Rodan + Fields and Beautycounter, have modified the model in terms of inventory requirements and are calling it “social selling.” Now sales come from leveraging the social networks of sales representatives who post about products on social media platforms like Facebook and Instagram.

If the deal closes, it would give Natura the leading position in beauty and personal care in Brazil, according to calculations from Jefferies analyst Stephanie Wissink, who said the combined business would eclipse Unilever by 5.5 points.

“The combination may be a response to share pressure for both companies. According to [Euromonitor data], Natura and Avon have both lost share in Brazil over the last 10 years, from a combined 24 percent in 2009,” Wissink said. Those market share points have gone to Unilever and Botica, she noted, during a time frame when the Brazilian beauty market has doubled in size.