Shares of Avon Products Inc. surged 14.6 percent on rumblings that the beauty firm is in talks to be acquired.
The stock closed Thursday’s trading session at $8.66. Close to 48.5 million shares changed hands, compared with a three-month average trading volume of nearly 10.4 million.
William Susman, founder of boutique advisory and research firm Threadstone Partners, said, “Avon is the leading personal-care company in the direct-selling space. They have validated direct selling and the brand has tremendous untapped potential.”
And while some financial sources say the timing could be right, given that the headaches over the international probes are over, not everyone was convinced that a deal would actually happen.
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“This is a transaction that involves an inordinate amount of risk,” said ConsumerEdge Research analyst Javier Escalante, noting that the buyer would likely have to raise debt.
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He also pointed out that there might not be an obvious exit strategy for a buyer. “Refloating Avon as a direct seller three to five years from now doesn’t strike us to be attractive enough, considering the multiples of direct sellers as a group,” he wrote in a research note issued on Thursday. “Taking Avon private, in our view, is only attractive if these hypothetical investors were to change Avon’s business model: private investors would buy ‘direct selling’ cash flows and hope to sell ‘beauty company’ cash flows to the market or a strategic buyer.
One investment banker said a private investment in public equity, or PIPE, makes more sense. A PIPE allows qualified investors to purchase stock in a public firm at a discount. The discount to the current market value per share is what the investors receive so the public firm can raise capital. The stock can be either for preferred or common shares. Sometimes it can take the form of convertible debt, which is called a structured PIPE.
One big stumbling block to an outright acquisition is price. The company has a market capitalization of $3.76 billion. An investment banker said a deal would be very expensive, noting that “any buyer would likely need to put $1.5 billion of equity on the table and finance the balance of a deal in debt.”
Several financial sources suggested that Avon is too complex and too expensive for one private equity firm to buy alone. But, it could potentially be attractive to a group of private equity firms that banded together to make the purchase.
Word of rumored deal talks surfaced on Thursday in a story from Dealreporter, which said Avon and private equity firm TPG had talks about a possible transaction.
An Avon spokeswoman said, “We do not comment on market rumors or speculation.” A TPG spokesman also declined comment.
TPG Growth, an arm of TPG Capital, has dabbled in beauty in recent years. Its portfolio includes Avon Japan and E.l.f. Cosmetics, and a minority stake in Beautycounter, a direct seller with a range of naturally positioned skin-care products. An industry source estimated Beautycounter generates $15 million in wholesale sales — which seems miniscule alongside the $10 billion Avon. But it’s clear from Avon Japan and Beautycounter that TPG has more than simply a passing interest in the direct selling model.
Another financial source noted that should TPG pursue Avon, it could opt to do a minority investment or partner with an existing direct seller to do the deal.
The discussions could also be the product of bulge bracket banking firms that look for possible targets and then see if they can find an investor. That’s how the banks generate business, and public companies even if they have no interest in being acquired are obligated to at least listen to the pitch whenever there’s a chance for enhancement of shareholder value. Given TPG Growth’s stake in Avon Japan, trying to put the two together would be an obvious choice.
Avon’s chief executive officer, Sheri McCoy, has been in the hot seat almost from her arrival at the company in 2012, given that she inherited a company with slowing sales and legal woes. But she has made strides. Shortly after taking the job, she fended off an unwanted bid from Coty Inc. of $10.65 billion, and later implemented a $400 million cost-saving program.
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