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Avon shares jump as Brazil's Natura nears all-stock deal

Avon Products
Scott Eells | Bloomberg | Getty Images

Avon Products shares jumped nearly 12 percent on Wednesday as Brazilian cosmetic maker Natura Cosmeticos SA moved closer to acquiring the U.S. company via an all-stock deal to unite two of Brazil's most popular makeup brands, moving Natura closer to its goal of a global market.

The companies said they were in advanced talks on a deal in which Natura would become majority shareholder in the 133-year-old U.S. group, which has a market capitalization of about $1.4 billion and is best known for its direct sales model.

Avon shares were up 11.9% in mid morning trading in New York on Wednesday, bringing their rise this year to 137%. Natura shares reversed early losses and were up 5%, accumulating a 32% rise this year.

Natura acquired The Body Shop from L'Oreal two years ago for around $1 billion and has been working on turning around the retail chain, which had struggled with increased competition.

Natura may also face challenges with Avon, which has been strong in Brazil and other parts of Latin America but has faced an uphill path in the developed world.

Avon North America, which controls the company's U.S. operations and is private, was sold last month by investment firm Cerberus Capital Management to LG Household & Health Care for $125 million.

Natura is "pursuing the goal of becoming a global brand", analysts at Brasil Plural said. They said Natura would need to invest in the Avon brand in Brazil and may also need to invest in its logistics, even as it keeps working to revive The Body Shop brand.

Natura, which began using a direct marketing model similar to Avon's but has since developed a network of retail stores, still has 1.1 million "consultants" who sell its products in Brazil and 600,000 in other Latin American countries, according to the companies.

Avon has 1 million consultants in Brazil, but many of them sell both brands, with Natura cultivating a higher-end image.

Deal structure

Reuters reported last week that Natura was close to completing the deal to buy Avon

Considering their market capitalizations, Avon would have around 80% of the combined entity. But a report by the Financial Times on Wednesday said the deal values Avon at more than $2 billion. The FT said Natura would own 76% of the combined group.

Considering such a valuation, the combined entity would have earnings before interest, taxes, depreciation and amortization (EBITDA), of $3.35 billion, BTG Pactual analysts led by Luiz Guanais said in a report.

Natura has secured lines of credit mainly from local banks, though the deal will not involve cash payments. The all-stock deal for Avon will allow Natura to avoid further leverage after it financed the Body Shop deal with debt.

The funding may be used to refinance Avon's debt, one source with knowledge of the matter said. The new company would have debt equivalent to 3.7 times its annual EBITDA, which is moderately high.

"The Avon deal would add complexity to Natura's business model," BTG analysts said.

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