After a dismal fiscal year 2013, rumors of a potential buyout of cosmetics manufacturer Avon Products (NYSE:AVP) are being floated in the market.  The company is a leading manufacturer of beauty, fashion and home products, with a market capitalization of approximately $6.16 billion and annual revenues of nearly $10 billion. Avon’s financial performance has been impacted strongly by various internal and external factors over the past few quarters.
While volatile exchange rates resulted in weak reported revenue growth rates in Avon’s largest market of Latin America, strategic executional lapses in North America and Asia-Pacific weighed on the company’s revenues. The renewed buyout rumors mainly revolve around three scenarios: (i) the company divesting its North American and Asia-Pacific businesses (ii) selling itself whole to another direct-selling player, or (iii) being bought by a leveraged buyout firm.
In this article, we take a look at the 2012 Avon-Coty buyout talks and understand the implications of exiting from the North American and Asia-Pacific markets. We believe both these geographies are weak links in terms of product and channel presence in the company’s geographic portfolio. We currently have a Trefis price estimate of $14 for Avon Products, in line with its current market price.
Recap of the Avon-Coty Buyout Talk In 2012
In 2012, French beauty products manufacturer Coty offered to buy the struggling cosmetics maker Avon for approximately $10 billion, or $23.25 per share, compared to Avon’s then market price of $19.36.  Later on, Coty further sweetened the deal to $10.7 billion for Avon. However, Avon rejected these bids from Coty, stating the valuation was too low. In hindsight, the deal offered by Coty for Avon looks to be an extremely good deal. Avon’s stock currently trades at $14.19 on the NYSE exchange, 39% lower than the price Coty offered in 2012.
What Would it Mean to Exit North America and Asia-Pacific Businesses
Avon’s revenue share from North America and Asia-Pacific declined from 25% in 2012 to 22% in 2013 due to double-digit declines in revenues in both regions. Revenues from North America declined 17% to approximately $1.46 billion in fiscal year 2013, which included the divestiture of its Silpada business in July 2013. Similarly, revenues from the Asia-Pacific region contracted 16% to $758 million.
In the North American market, Avon faces strong executional challenges in terms of representative attrition. The company reorganized its independent sales force during the second quarter of fiscal year 2013, and this particular reorganization of field personnel resulted in severe disruption in customer-representative relationships. Other factors were in play as well. There was the fallout of the global hiring system in Q3FY13 and the rollout of the new order management system, as well as a troubled Service Model Transformation (SMT) module in Canada during FY13. All of these issues contributed to the decline in the number of active representatives for Avon in the region.
Avon’s problems in the Asia-Pacific market are a result of the obsolete store-format that the company has in the region. The company ventured into the Chinese market in 1990, but legal challenges from the Chinese Government forced the company to operate solely through a retail store-front channel between 1998 and 2006. In 2006, Avon was amongst the first companies to get a license for direct-selling its products to customers in China. However, beauty boutiques set up since 1998 continue to be a major point-of-sale for the company in the Chinese market. In recent times, shift in buying dynamics from Chinese consumers towards prestige cosmetics has resulted in strong decline in sales for Avon China.
We believe Avon’s turnaround in both geographies is a long and arduous process. Constant currency revenues have declined 16% and 15% respectively in both these geographies in FY13. And given the current financial position of the company, we believe exiting the loss-making North American and Asia-Pacific businesses should boost the company’s performance going forward. This move opens up the possibility of increasing re-investments into profitable markets of Latin America (LatAm) and Europe, the Middle East and Africa (EMEA).
Both these markets posted constant currency revenue growth rates of 6% and 2% respectively last fiscal year. Additionally, the LatAm and EMEA markets, which together contribute to 77% in revenues, have had higher adjusted operating profit margins of 11% and 15% respectively in FY13. Comparatively, North America and Asia-Pacific markets had an adjusted operating profit margin of -3% and 5% respectively in FY13. Although Avon has stated its intent in turning around both markets, we believe exiting these businesses gives it more room to focus exclusively on growth markets, thereby reducing the strain on its financials.
In our next article, we take a look at both sides of a possible takeover of the entire Avon entity for (i) a direct-selling player (ii) a private equity investor.Notes:
- Stalling Means Avon May Be Calling On Buyers: Real M&A, Bloomberg, June 2014 [↩]
- Avon Rejects $10 Billion Buyout Offer, The Epoch Times, April 2012 [↩]