Avon To Sell Off Business In North America

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Apr 21, 2015

Posting losses since over a year, the America-based international manufacturer Avon Products Inc. (AVP, Financial) plans to exit its North America business and sell it off in order to recover from its ever worsening market position. The company had been looking for alternatives, and the announcement came in line with its tryst. The news made a positive impact with the company’s stock gaining 18.1% to reach $9.46.

Avon’s falling numbers

With market capitalization of $4.1 billion, the direct seller of beauty, household and personal care products had recorded losses to the tune of 44% in the last year. Although the company boasts of being the fifth-largest beauty company and second-largest direct selling enterprise in the world, it has been losing on several of its markets around the world. In North America, the company has been recording losses for the past three years with a total revenue of just 14% being generated in 2014 from North America. The region yielded $1.2 billion annual sale in 2014 which was down 17% from the previous year.

American connection

Finding an alternative means either selling a part or whole of the market or revamping the company’s portfolio. Although North America seem to be attached to Avon emotionally with millions of sales representatives present in the market, the decision to exit had been long pending, and it is time Avon acted on it. The company also delayed its scheduled strategic meeting with a view not to disclose about the alternatives publicly as of now. However the company gave the reason for its cancellation as giving more time to newly appointed Chief Financial Officer James Scully time to review the company’s composition and functioning.

The company has previously sold its stake in Avon Japan to private equity firm TPG Capital in 2010. It also received a bid of $23.25 per share for all of Avon from another seller of beauty products Coty Inc. (COTY, Financial). Even after an increase to $24.75 a share, the offer was declined by Avon in 2012.

Not only North America, but the company recorded losses in one of its high profit Brazil markets as well. It hasn’t yet explored the selloff option for Latin American and other such evolving markets yet. There have been several other things leading to a negative impact on the company in the market including animal testing issue and overseas bribery scandal.

Overseas bribery scandal

In the already tough times, Avon faced several other controversies and conflicts from time to time. The bribery scandal revealed last year in specific had a negative impact on the company and its sales. A huge sum had also been spent on the law proceedings by the company as well.

After being warned by the Foreign Corrupt Practices Act of possible violations going on from Avon’s side in 2008, the company began an investigation in China, and four executives from Asia and the U.S. were found guilty and suspended. The company had to shell out $170 million as legal fees and costs incurred for investigation were $59 million in 2009 and $95 million in 2010 totaling to $250 million by the end of 2011. In 2014, Avon gave $135 million to settle the bribery charges and $68 million as penalties, interests and fines.

Road ahead for Avon

Although Avon is positive on growing back revenues from North American market but still it looks like the company will stick to its plan of selling the business here. It looks forward to revamping its portfolio and expects a massive funding of $500 million to $1 billion to get their business back on track. The cost-cutting or even the job cut methods are not going to work anymore, and it's time the company looked for some other alternatives to fix up things. Avon has been valued at $6 billion in case of a takeover, by Linda Bolton Weiser of B. Riley & Co.