It appears to be spring cleaning time among the beauty giants.
This story first appeared in the April 15, 2015 issue of WWD. Subscribe Today.
Both Procter & Gamble and Avon Products Inc. are said to be looking at major moves to divest problematic parts of their sprawling empires. P&G has been shopping its beauty portfolio for months, with word of numerous approaches leaking out. Now Avon is weighing its strategic options, including the potential sale of its beleaguered North American operations.
Investors were keen on the idea of some big changes at Avon and drove the stock up 14.2 percent to $9.15. P&G’s stock had a much quieter day, inching up 0.2 percent to $83.60.
There was some foreshadowing of the news at Avon. On Monday, the company pushed back its planned investor day next month, noting, “The decision to postpone the meeting follows the recent appointment of James S. Scully as the company’s chief financial officer, to allow the company adequate time to prepare for a more robust discussion at the meeting.”
The meeting could have put Avon executives in a bind if they were working in the background on a big strategic shift that would reshape the company.
Avon is no doubt up for a “robust discussion” when it updates investors on its turnaround efforts and first-quarter results on April 30. A spokeswoman for the company declined to comment on the examination of its strategic position.
But Avon’s board will have a fresh voice with deep experience at the firm as it looks to the path forward. Former president and chief operating officer Susan Kropf is returning as a board member. The highly regarded executive spent 36 years at Avon, rising up the ranks.
The company has had a tough go of it since Kropf left in 2006.
Sheri McCoy, who took the reins as chief executive officer in 2012, has been struggling to turn around the business, while also coping with a costly Foreign Corrupt Practices Act investigation that wrapped up in December.
The beauty giant was once courted heavily by rival Coty, which offered as much as $10.7 billion to buy the firm in 2012, but Avon fought back the advances and decided to go it alone.
In retrospect, that could look like something of a mistake, at least for shareholders. Even with Tuesday’s jump, Avon has a market capitalization of just $3.98 billion.
One investment banker in the beauty space said it’s not clear if Coty would have paid the more than $10 billion price tag in the end.
“Who knows if they would have gotten there?” they said. “Should have, could have, would have.”
The banker noted that newer direct-selling businesses with strong online components, such as Stella & Dot and Rodan + Fields, have proven the model still has some juice.
“The newer version of these direct-selling models do work, but if you don’t evolve, you start to decline,” the banker said.
Avon has been trying to move its model into the current age, but so far hasn’t gotten the formula right.
Wall Street has been pelting the company with questions about its North American business. Over a year ago, Stifel analyst Mark Astrachan noted that the company could sell off operations in its home market if its turnaround efforts failed.
On Tuesday, Astrachan said such a sale “could make sense and would improve sales growth and EBITDA [earnings before interest, taxes, depreciation and amortization] margin of the remaining business.”
Looking at the 7.2-times EBITDA multiple private equity giant TPG paid for Avon-Japan in 2010, Astrachan said the North American business could be valued at $412 million, or 7 percent of the company’s current enterprise value.
There is reason for caution, though. The analyst also noted that “a sale of North America is not without risks, including distributions relating to running the remaining business, the potential negative impact on Avon’s global grand positioning as a U.S. beauty brand, and stranded overhead.”
News Avon was examining its strategic options, including a possible sale of the North American business, was first reported by The Wall Street Journal.
The potential sale of two major beauty businesses at the same time illustrates both how much money there is in the market looking for acquisitions and how easy it is to fund many deals. It also shows how competitive the beauty retail scene has become.
Javier Escalante, an analyst at Consumer Edge Research, said Avon and P&G’s problems stem from the shifting landscape.
“The industry has become more fragmented,” he said, adding that beauty has moved away from the mass market toward specialty, where Avon doesn’t have access and P&G doesn’t have strength.
“The industry has moved to a retail infrastructure that favors niche brands,” Escalante said. “P&G doesn’t do niche well. It doesn’t move the needle.”
Wall Street analysts are closely watching P&G to see what its ultimate plans are for its beauty business. The prevailing thought is that the group will sell off all but the mass-market skin and hair-care brands, such as Olay and Pantene. Escalante noted that those two categories account for nearly $10 billion in net sales, or about half of P&G’s global beauty unit.
The real value, he said, would come from spinning off the beauty brands as a larger chunk, rather than selling them piecemeal. “The more brands you divest together, the more value you create,” said Escalante. The idea has gained traction as financial observers speculate on P&G’s next move, which could include an initial public offering of the beauty operations.
From the outside, P&G’s plans seem be shifting from month to month, but one financial source with knowledge of the firm’s intentions described it as a very organized and deliberate process.
Bernstein Research analyst Ali Dibadj has been one of the loudest proponents of P&G splitting up the company. He first wrote about the idea nearly three years ago in a June 2012 research note, stating, “If Procter & Gamble is unable to improve its prospects over the next several quarters, we strongly propose that larger portfolio shifts be considered, among other changes, by the board and management.”
On Tuesday, he told WWD, “It’s been our view for a while that the company should do this. I am reticent to believe that P&G would go so far as to break up the company, but I’d be pleased if it did.”
Dibadj values P&G’s beauty, hair and personal-care businesses at about $54 billion and its grooming business at about $33 billion. By comparison, P&G has a market capitalization of nearly $226 billion.
“Although we like and have proposed the idea for years, we believe the spin-off of beauty in one piece counters the company’s recently communicated plans,” he said.
In his view, P&G is a large and complex company, and breaking up the group might ultimately help its performance by simplifying the tasks before it. It’s a similar strategy to that most recently adopted by General Electric Co., which last week revealed plans to sell off its financial services operations in order to focus on the core industrial businesses on which the company was founded.
Dibadj added that potential divestitures could include prestige fragrances, salon brands and smaller labels, which could either be shut down or divested. “I’d be surprised if hair care or Olay goes,” he said. “I don’t think P&G has the stomach to dismantle the company.”
Several analysts mentioned Coty as a potential suitor for some of P&G’s beauty brands, particularly for the fragrance portfolio.
Gerald Phelan, Standard & Poor’s lead analyst for P&G, said the company seems to be getting more ambitious in its plans to trim down as the process continues.
“Even if they go from $83 billion in sales down to $63 billion, they’re really not losing that much scale,” he said. “They’re retaining a lot of their major brands, the Tides and the Pampers, so they’re going to have a ton of bargaining power in the supply chain.”
He also said that the company grew too much during A.G. Lafley’s first stint as ceo.
“A.G. Lafley was growing the company and, quite honestly, I think it got too big. I think it [the move toward divestitures] was a healthy thing to do.”
In particular, he noted that the beauty business is more focused on the department store space, while P&G plays better in the grocery aisle. “They’re a big player in beauty, but some of their competition in beauty is more formidable than it is in the grocery space,” Phelan said. “They can take on Kimberly Clark all day long.”