Brazil’s Natura buying Avon in $2B deal

by Ike Obudulu Posted on May 22nd, 2019

Natura Cosmeticos, the Brazilian cosmetics company that owns The Body Shop, has agreed to acquire Avon Products Inc (AVP) in an all-stock deal that values the US-listed group at more than $2bn, the companies said late Wednesday. The merger would create the world’s fourth-largest cosmetics company. Shares of Avon jumped 15% on the news.

The São Paulo-based company will own about 76 per cent of the combined group, while the remainder would be owned by Avon shareholders.

The deal has been in the works for several months and Natura expected it would translate into annual gross revenues of more than $10bn for the combined group thanks to access to more than 200m clients worldwide.

As part of the deal, a new Brazilian holding company, Natura Holding SA was created. Based on the exchange ratio of 0.300 Natura Holding shares for each Avon share, Natura shareholders will hold 76% of the combined company, while Avon shareholders about 24%.

The deal is expected to generate annual cost savings of $150 million to $250 million, which will be partially reinvested to further increase presence in digital channels and social media, R&D, brand initiatives and expansion the geographical presence of the group.

The deal values Avon at around $3.7 billion, and the combined group would have an enterprise value of about $11 billion. The merger of Avon and Natura will create a company with annual sales of over $10 billion and more than 40 thousand employees and presence in one hundred countries.

Natura plan to list American depositary shares on the New York Stock Exchange after the deal is completed, which is expected in early 2020.

AVP closed Wednesday’s trading at $3.49, up $0.29 or 9.06%, on the NYSE. The stock further rose to $0.53 or 15.19% in the after-hours trade.

Avon, which is based in London and listed in New York, has struggled in recent years, and in January cut 2,300 jobs. Its equity value, which has dropped dramatically, was about $1.4bn based on the stock’s closing price on Tuesday.

The company pioneered the direct-selling model in cosmetics — embodied by its doorstep Avon Lady sellers. But it has lost market share to savvier competitors such as LVMH-owned Sephora, Estée Lauder and L’Oréal as the rise of social media disrupted the cosmetics business.

Millions of teenagers now scout for beauty products on Instagram or YouTube vloggers and then acquire items online or in bricks-and-mortar stores. Natura, which has been eyeing opportunities to expand globally, believes it can revive Avon’s fortunes.

“We have always looked at Avon with respect and admiration,” said Luiz Seabra, Natura’s co-founder and co-chairman. “Natura was founded on its passion for beauty and relationships, and today’s transaction creates a major force in the direct-to-consumer space.”

By buying Avon, Natura will be able to expand internationally, particularly in Asia, Europe and Latin America. Three years ago, Avon decided to spin off its North America business, which was controlled by private equity group Cerberus Capital until recently. The spun-off company took on $230m of Avon’s long-term liabilities, a move that made it easier to sell the company to Natura.

The South American group acquired The Body Shop in 2017 from L’Oréal in a deal worth €1bn, and has been focusing on boosting the UK retailer’s footprint globally. “This is a slightly different deal from that one, in the sense that it’s of a much larger scale,” said an executive at Natura, which also bought the Australian brand Aesop.

Natura was founded as a small shop in an upscale street of São Paulo in 1969, and is known for its sustainability efforts. It sources a lot of its materials from the Amazon, where it works closely with indigenous people and local farmers.

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