Avon (AVP) In Play: Barington, Cerberus Duel For Cosmetic Maker

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Unlike earlier this year, or on several other occasions (chart below), this time the breaking news that cosmetic maker Avon Products is in play is apparently not a hoax.

The Wall Street Journal is reporting that Avon is in advanced talks to sell its North American business to Cerberus Capital Management. According to knowledgeable sources, Cerberus plans to make a significant investment to boost the firm’s balance sheet. That would mean Cerberus would become Avon’s biggest shareholder, and may possibly receive one or more board seats.

However, this proposed spin off of assets was immediately opposed by hedge fund firm Barington, which holds a 3% stake in Avon, and has just unveiled a restructuring plan for the beleaguered direct-sales cosmetic firm.

For background, industry rival Coty Inc offered to buy Avon for $10 billion back in 2012, and the stock ran up to above $23 a share, but the BoD rejected Coty’s offer as too low and “opportunistic”.

More on Barington’s move to restructure Avon

A group of private equity investors helmed by Barington Capital proposed a restructuring of Avon earlier this week, arguing that the cosmetics maker is “significantly undervalued” and saying they strongly opposed the sale of the firm’s North American division to Cerberus Capital.

The Barington-led PE investors also include NuOrion Partners AG. The PE group made their plans public in an open letter they sent to Board Chairman Douglas Conant.

They argued that they had lost confidence in the management, pointing to their rejection of a takeover offer by Coty three years ago and a poor choice of CEO as the main reasons for the firm’s significant underperformance.

The letter from Barington noted: “We believe it is critical that Avon promptly add new independent directors who are focused on improving long-term shareholder value, ensuring that shareholder interests are protected, and recruiting a new senior management team that is capable of executing a comprehensive strategy to improve Avon’s performance.”

The letter from the investor group also strongly opposed any sale of Avon’s North America business or any kind of dilutive equity stake sale on unfavorable terms to shareholders (clearly referring to the current negotiations with Cerberus).

Analysts from UBS opine:

Newswires also reported that Oprah was considering an investment in the company, which Oprah has subsequently denied. While this would be a compelling incremental positive for the stock and story, this transaction is highly unlikely in our view;

We continue to believe management needs to raise money to fund the turnaround and pay for cash severance and other restructuring costs but isn’t likely to do so at any cost. Given the strength in the dollar, especially relative to the big emerging markets where the company competes, earnings and cash flow are under significant pressure and the company likely believes it would be better served waiting for macro to become less volatile before it raises funds, noting that material dollar strength from here could bring the company to a cash burn scenario, even with the dividend cut.

Bernstein analysts state:

Although selling off North America and pressure on/change in management and Board would be beneficial to create some short-term improvement, we believe long-term, sustainable value creation for Avon would best come from selling the business piecemeal to strategic partners.

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