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Natura to Buy Avon Products for About $2 Billion in Stock

Fabiola Moura
Natura to Buy Avon Products for About $2 Billion in Stock

(Bloomberg) -- Brazil’s Natura Cosmeticos SA agreed to buy rival Avon Products Inc. in an all-stock deal valued at about $2 billion, positioning it as a growing force in the booming global cosmetics and skincare industry.

Controlling shareholders of Natura, which bought the Body Shop retail chain in 2017, will form a new publicly traded holding company that will offer 0.3 share for every share of London-based Avon, according to a statement. Holders of preferred Avon shares will get $530 million in cash assuming the deal closes in early 2020.

Including debt, the transaction is valued at $3.7 billion, the companies said.

Natura shareholders will own about 76% of the merged company, with Avon’s shareholders owning the remainder once the deal is closed. The new company’s shares will trade in Sao Paulo and New York. Avon shares surged as much as 14% to $3.98 in New York trading, while Natura fell as much as 6.2% to 57.67 reais in Sao Paulo, the biggest decline on Brazil’s benchmark stock index.

The tie-up cements the largest direct-sellers in the global cosmetics business. Avon, founded in 1886 in the U.S., pioneered a then-innovative sales model by soliciting fans of the brand to become saleswomen themselves. The combined businesses will have more than 6 million direct sellers, 3,200 stores and operations in 100 countries, according to the companies.

Bank Financing

Banco Bradesco SA, Citigroup Inc. and Itau Unibanco SA are providing as much as $1.6 billion in financing for the cash consideration for Avon preferred stock holders and for payments that may be required for Avon’s debt. While Natura expects Avon bondholders to grant consent to the deal, the company has secured extra financing in case it needs to buy back some of the debt, Chief Financial Officer Jose Filippo said in a conference call with journalists today.

Avon -- a multilevel marketing company -- has long used door-to-door sellers, colloquially dubbed “Avon ladies,’’ although much of the industry now relies more on social media. The direct-selling beauty sales model has since been replicated by rivals from Mary Kay in the 1960s to newer upstarts like Younique and Rodan + Fields -- and even Natura.

After a tough period of sinking demand, Avon largely gave up on the U.S., selling its operations in the country to private equity firm Cerberus Capital Management LP in a deal announced in 2015. Last month, LG Household & Health Care agreed to buy Cerberus’s majority interest as well as Avon’s minority stake in the U.S. business.

Avon’s Struggles

Avon moved its headquarters to London after the 2015 agreement, saying the shift would help it focus on international markets. But it’s lost momentum: In its most recent earnings statement, Avon said its sellers base dropped 9% year over year, mainly driven by declines in Brazil and Russia. Earlier this year, it announced a workforce reduction of 10% to trim costs. The company currently operates in 57 countries.

That’s in part because Natura, founded in 1969, has become one of its fiercest competitors, with the ranks of its direct sellers reaching 1 million in Brazil alone. The Sao Paulo-based company is quickly expanding into the rest of Latin America, and it’s rolling out digital accounts and card payment machines to its consultants to make the sales process more digital. Natura is also introducing direct sales to the Body Shop, combining it with their website, stores and other points of sale points to give consumers a broader range of options.

While L’Oreal SA and Estee Lauder Cos., the world’s two largest beauty businesses, have managed to acquire hot brands and use them to attract new young customers, Avon hasn’t been as successful on that front, consistently losing ground to rapidly changing personal-care trends and startups.

Natura, on the other hand, became an investor at Dynamo Beauty Venture, a venture capital fund focused on identifying and acquiring minority stakes in emerging brands in the cosmetics and wellness segments. The fund’s efforts will focus on Europe, the U.S., and companies with innovative business models and large growth potential, Natura said in its last earnings release.

Natura said it plans to turn Avon around by speeding up the company’s existing initiatives on e-commerce and development of new products. It also plans on strengthening the brand and emphasizing the narrative around Avon’s historic focus on women’s empowerment. Natura sees cost savings of $150 million to $250 million from the combination.

Analysts at Bradesco BBI, the brokerage arm of Banco Bradesco, cut Natura’s rating to underperform, saying the stock has already priced in savings of about $300 million. Itau BBA analysts said “additional sources of value stemming from the transaction might continue to support the company’s shares in the short term,” and kept their outperform rating to the stock.

Read here what Bloomberg Intelligence wrote about it

“Today is a historic day,” Natura founder Guilherme Leal said on a call with journalists. “These two companies have been sailing in parallel for a long time and now they’re on the same boat.”

(Updates shares in fourth paragraph, adds CFO comment in sixth paragraph, replaces last paragraphs by analysts and founders’ comments.)

To contact the reporter on this story: Fabiola Moura in Sao Paulo at fdemoura@bloomberg.net

To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net, Jonathan Roeder, Lisa Wolfson

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