Avon seen engaging with TPG, industry sources say
Avon Products (NYSE:AVP) has been having discussions with private equity firm TPG Capital about a potential transaction, three industry sources said.
The New York City-based direct sales cosmetic company has been working on a turnaround for years amid stagnant revenue and a government investigation into allegations of corruption. In December, Avon announced a settlement with regulators in which it agreed to pay USD 135m.
It could not be learned if talks with TPG have advanced and it is unclear if Avon has engaged advisors to help it consider a possible transaction. Avon was not immediately available for comment and TPG declined to comment.
Avon has been considered a candidate for a leveraged buyout given its strong cash flow, several industry sources said, but the business is also underperforming and a deal would carry a fair amount of risk.
The company’s problems include little top line growth, lack of spending necessary for brand/pricing improvement and gross margin expansion, and some management turnover, as reported. Over the past year, Avon’s stock has declined more than 50%.
To partially address these issues, Avon could look to shut down its US-based direct sales business, which has struggled and represents only a minority of the company’s sales, an industry executive said.
Avon has a market cap of approximately USD 3.3bn and had USD 1.8bn in net debt as of September 2014, putting its enterprise value at around 12.6x unadjusted LTM EBITDA.
To secure a deal, a buyout may have to be structured using preferred shares or mezzanine debt in order to enhance what may be limited returns, one of the industry sources said. Avon may be able to be levered at 6x-6.25x EBITDA, the source added.
The buyout talks come two years after Avon rejected a USD 10bn offer from Coty (NYSE:COTY), a New York-based cosmetics firm. Subsequently, Avon’s CEO stepped down and Coty pursued an IPO.
In March of last year, Avon entered into a partnership with Coty in Brazil that allowed Avon sales representatives to sell Coty fragrances. An industry banker said at the time that if the partnership was a precedent to a sale, it would be a long courtship, implying he did not think a takeover was in the works.
TPG has connections to Avon, having acquired the company’s Japanese business for USD 38m in 2010.