Shares of Avon Products Inc. gained 7 percent Thursday on reports that Cerberus was in negotiations to acquire the beauty firm’s North American business.
An Avon spokeswoman could not be reached for comment. A spokesman for Cerberus declined comment.
One banker, who asked not to be named, said Avon could not find a buyer after putting the entire company on the market in the spring and throughout the summer. This banker noted that Avon is the type of deal that Cerberus goes after, “a really hairy, messy turnaround.”
Sources said the private equity firm has been in discussions with Avon since the summer, although back then Cerberus was said to be looking at making an investment in the firm in what is known as a PIPE, a private investment in public equity. Avon has been considering possible strategic alternatives since earlier this year.
The beauty firm has been struggling for some time, losing market share to beauty e-tail start-ups as consumers become more comfortable with buying beauty products online.
The Wall Street Journal first reported on Thursday the discussions of a possible sale of Avon’s North American business to Cereberus. The report also said activist investment firm Barington Capital Group is part of a group that has a 3 percent stake in Avon and plans to launch opposition to the possible deal with Cerberus, although that’s sometimes a negotiating tactic for a higher offer. That campaign is said to include finding a replacement for Avon chief executive officer Sheri McCoy.
A representative from Barington declined comment.
Shares of Avon Products Inc. closed at $3.99, but then gained another 2.5 percent to $4.09 in after-market trading. The 52-week range stretches from a high of $10.20 to a low of $2.41. Over 26 million shares changed hands on Thursday, compared with a three-month average volume of 11.4 million shares. But the three-month average is skewed from the volume in Wednesday’s trading session on rumors that TV personality Oprah Winfrey was eying a stake in Avon. That rumor sent shares of the company up by as much as 17.5 percent, although a spokeswoman for Oprah has since said, “This information is not true.”
As for Wednesday’s closing price of $3.99, that’s a steep drop from the $24.75 a share buyout offer from Coty Inc. back in April 2012 that Avon rejected.
Avon also was the subject of a hoax buyout in May. Given that the firm’s liquidity has tightened, and the price investors have to pay to insure the company’s debt against default has shot up, it’s no surprise that Avon periodically appears on the takeover rumor mill.
In its most recent third quarter for the period ended Sept. 30, the firm ended in the red with a $697 million loss, or $1.58 a diluted share, against net income of $91.4 million, or 21 cents, a year ago. Total revenues dropped 22 percent to $1.67 billion from $2.14 billion, which included a 20.8 percent decline in net sales to $1.63 billion from $2.06 billion. Wall Street was expecting earnings per share of 8 cents on revenues of $1.68 billion.
At the time, McCoy said in a conference call to Wall Street analysts, “Avon continues to face unprecedented headwinds.” She noted that those headwinds included disproportionate exposure to foreign currency fluctuations, as well as a weaker-than-usual macroeconomic backdrop for emerging markets.
And while the EMEA – Europe, Middle East and Africa – and Russia were delivering revenue growth, Latin America and Mexico remained steady, McCoy said. The ceo said progress in the North American business was slower than the company would like, with the trend in active representatives still down when compared against the prior year. Overall, the active representative base fell 1 percent for the quarter, driven by North America, Venezuela and Argentina.
In the U.S., McCoy said the main focus has been on “improving representative engagement and right-sizing our cost structure.” The biggest issue has been on the need to “bring in and retain more new representatives,” she told analysts.
One big takeaway from McCoy’s comments on the call was that she didn’t expect things to reverse in the foreseeable future.
That would raise an interesting question for anyone, including Cerberus, on what initiatives would work in turning around the business. While Avon’s model could be changed, that would require time, money and effort with no guarantee of success.
Further, Avon would still face pressure from retailers such as Sephora and Ulta Beauty, both of which are doing well in the beauty market place. Ulta on Thursday posted third-quarter results, with EPS of $1.11, which beat Wall Street’s consensus estimate of $1.05. Avon also faces competition from newer competitors such as Julep, a subscription box beauty brand e-tailer that sells higher priced items, but provides consumers with a continuous influx of new products each month for them to try.