Avon Discusses Stake Sale With Private-Equity Firms
Avon Products is negotiating to sell a stake to a private-equity firm, a sign that the cosmetics purveyor has been unable to find a buyer for the entire company.
Thursday's news didn't go over well with Wall Street. Investors often frown on companies selling stock at depressed prices and diluting existing owners. Shares of Avon fell 9.5% to $4.10, and are now down 56% on the year. The stock has lost roughly 90% of its value from a 2004 high and the company has a market capitalization of less than $1.8 billion.
Avon is in talks about a stake sale with a number of private-equity firms, according to the people familiar with the matter. They include Cerberus Capital Management LP and Platinum Equity LLC, which specialize in distressed investing, these people said. Bids are due next week. A stake sale is just one of the options Avon is currently considering, they added. Terms of any possible deal are unclear, and there is no guarantee one will materialize.
The New York-based company, which has been around for more than a century, has tried for years to reverse sales declines and stem an exodus of sales representatives. Its business of selling cosmetics and home goods door-to-door via a network of around six million active representatives has had difficulty keeping up with changing shopper habits, and Avon has been slow to increase sales via the Internet. The company posted a loss of nearly $400 million on $8.9 billion in sales last year. It has been cutting costs deeply and recently reported a small profit for its U.S. business, which has been particularly troubled.
In April, The Wall Street Journal reported that Avon was exploring strategic options, including a sale of the company or its North American business.
The type of deal the buyout firms are considering--known as a Private Investment in Public Equity--is sometimes used as a fallback option when a struggling company strikes out on a full sale. In 2014, for instance, shoemaker Crocs took a $200 million investment from Blackstone Group that gave the private-equity firm a 13% ownership stake in the ailing footwear maker. The investment came after Crocs abandoned an effort to sell itself.
Securing an investment from a prominent new shareholder could help stabilize Avon's stock and bolster its liquidity. The company's debt is rated speculative-grade by major ratings firms, and while its finances aren't precarious, its cash has been declining. At the end of June, Avon reported $697 million in cash and equivalents, down from $961 million at the end of 2014.
In June Avon obtained a new $400 million, five-year credit line from banks, but its weaker finances resulted in stiffer lending terms. The new credit line, if drawn upon, would be secured by Avon's U.S. assets and its stock in some subsidiaries.
Avon "needs a lot of money to improve its business," Bernstein Research analyst Ali Dibadj said Thursday. The company needs to reinvest in its brand and make improvements to its supply chain, he said. Mr. Dibadj said that raising cash in the debt markets would be too costly and difficult for Avon, and selling stock publicly would deeply dilute existing shareholders. An investment from a private-equity firm could come in the form of convertible or preferred stock that would give Avon some flexibility, he added.
Long defined by the eponymous Avon lady, the company and its business model these days appear dated, relying heavily on personal relationships and product catalogs. Its earlier successes sprang from Avon enabling stay-at-home mothers and other women to supplement their family incomes, but in recent years it has faced increasing competition from other direct sellers of cosmetics and home goods, as well as bricks-and-mortar retailers. It also has had difficulty stemming declines in active representatives.
The company for years was hobbled by a federal probe into alleged improper payments abroad. In May 2014, Avon agreed to pay $135 million in fines under a settlement. The probe had already cost the company roughly $340 million over the years in legal and other fees.
Avon's cash reserves are falling because earnings in recent quarters have been weighed down by weakening foreign currencies. Selling products in more than 80 countries or foreign territories exposes Avon to what the company recently described as "an environment of extraordinary currency pressure." In the first half of this year, Avon said currency swings reduced its revenue by 18 percentage points.
Three years ago, Avon tapped former Johnson & Johnson executive Sheri McCoy to revive its fortunes. The 56-year-old CEO has tried to return Avon to a growth path, but so far her efforts have had mixed results and the company's stock has fallen 81% since her appointment. Shortly before Ms. McCoy was named chief executive, the cosmetics company spurned a takeover advance from fragrance maker Coty that valued it at $10.7 billion. Coty has since gone public and itself now has a $10.4 billion market value. Earlier this summer, it won an auction for a portfolio of beauty brands being divested by Procter & Gamble. That deal, valued at roughly $13 billion, will more than double Coty's size.
Avon's recent exploration of strategic alternatives drew other headlines in May, after a firm calling itself "PTG Capital" launched a bogus bid for the company. The news of the supposed bid, at a huge premium, sent the shares soaring briefly before it became apparent it was a hoax. A 37-year-old man in Bulgaria was the mastermind behind the takeover offer, the Securities and Exchange Commission later alleged.
Serena Ng and Joann S. Lublin contributed to this article.
Write to Dana Cimilluca at dana.cimilluca@wsj.com and Dana Mattioli at dana.mattioli@wsj.com