Risk

Cerberus Takes Avon North America Private

The private equity firm is also investing $435 million in Avon Products for an ownership interest of 16%.
Katie Kuehner-HebertDecember 17, 2015
Cerberus Takes Avon North America Private

Struggling cosmetic company Avon on Thursday said that it was selling the majority of its business to New York private equity firm Cerberus Capital Management.

“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,” Avon’s chief executive Sheri McCoy said in a press release.

The partnership calls for Avon North America to be separated from the publicly held Avon Products, to become a privately-held company majority-owned and managed by Cerberus.

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Cerberus will purchase an 80.1% interest in Avon North America in exchange for a $170 million equity investment. Avon North America will also assume roughly $230 million of long-term liabilities from Avon Products, which will be partially offset by a $100 million cash contribution from Avon. The transaction is anticipated to be completed in the spring of 2016.

Cerberus will also make a $435 million investment in Avon Products, in the form of convertible perpetual preferred stock with a conversion price of $5 per share and a dividend that accrues, or is payable at Avon’s option under certain circumstances in common shares or cash, at a rate of 5% per annum. Assuming the conversion of the preferred stock to common stock, this equates to an ownership interest of about 16.6%.

The announcement comes amid a four-year sales slump and earnings losses for Avon, according to the New York Post.

“The faded American icon, founded by traveling book salesman David McConnell in 1886, still relies on a network of sales reps to hawk its beauty products and has been slow to adapt to the Internet and other changing shopping habits,” the Post wrote.

Avon Products expects to incur a pre-tax loss due to the sale of the North America business in the range of $325 million to $425 million primarily due to the recognition of deferred historical losses on the company’s pension and post-retirement benefit plans. The actual pre-tax loss due to the sale will be dependent on a number of factors including discount rates and the actual return on plan assets, Avon said.

Avon also announced it is suspending its quarterly dividend starting next year.