Avon Products signed a strategic partnership with Cerberus Capital Management to drive l”ong-term value for shareholders“, after many failed and/or rumored bids (see chart below). The partnership will focus on enhancing the company’s operations in international markets and revitalizing its North American business.
The company also decided to suspend its quarterly common stock dividend starting in the first quarter of 2016.
Cerberus invests $605 million
The board of directors approved Avon’s partnership with Cerberus, which included a $605 million equity investment by the affiliates of the private equity firm.
The private equity firm will invest $435 million in Avon, which 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 the company’s options in certain circumstances in common shares or cash, at a rate of 5% a year.
According to the company, the conversion price represents a 46% premium to the 30-day volume-weighted average price (VWAP).
Cerberus’ stake in Avon is approximately 16.6% as of December 16 assuming the conversion of the preferred stock to common stock.
Avon will spin off its North American business into a privately-held company majority-owned and managed by Cerberus. The private equity firm will acquire 80.1% interest in the business for $170 million. The North American business will also assume approximately $230 million of long-term liabilities from Avon, which will partially offset the liabilities by contributing $100 million in cash.
Avon will be positioned for accelerated growth
The company believes that it will obtain significant strategic, operational and financial benefits from the partnership with Cerberus, and its international business will be positioned for accelerated growth.
“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 Avon CEO Sheri McCoy
She added that the “partnership and structure will also accelerate profitable growth in the remaining Avon portfolio.” The company’s remaining portfolio represent approximately 86% of consolidated revenues for the nine months ended September 30, 2015.
Furthermore, McCoy emphasized that Cerberus’ equity investment together with the suspension of dividend and additional operating efficiency provided financial flexibility for the company to implement its operational and capital plans.
“We believe 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 we considered alternatives,” she said.
The company will reduce the size of its board of directors to eleven following the completion of the transaction.