Could private equity spell the start of Avon’s turnaround?

By Simon Pitman

- Last updated on GMT

Could private equity spell the start of Avon’s turnaround?

Related tags Private equity Stock market Kohlberg kravis roberts

A report that executives from Avon Products are in talks with private equity firm TPG Capital sent shares in the company sharply rising yesterday.

Avon’s share price has been in free fall for the past year as it has battled through falling global sales, a comprehensive restructuring programme and an investigation into corruption charges that mainly related to its business in China.

However, upon hearing the news, Investors clearly reacted positively as the company’s share price jumped the most in nearly two years, rising by around 17% to close Thursday’s trading on the New York Stock Exchange at $8.66 a share, up from a low of $7.59 when morning trading started.

The turning point?

In contrast to yesterday’s hike, the share prices have been in a sure but steady decline over the course of the last year, having fallen 45% compared to the same time last year.

The rumour mill over Avon’s future has been in full swing of late, as the company continues to struggle with mounting financial challenges.

However, throughout the tough times, the company’s cash flow has remained strong because of its direct sales business model, make it a stronger candidate for a buy-out, merger or a cash injection from a private equity investor.

News of the discussions between Avon and TPG Capital executives was broken by online news provider Dealreporter, with the report not stating how advanced the discussions were.

TPG Capital is one of the largest global private equity investment companies, and since it was founded in 1992 has raised more the $65 billion in investor commitments across its 18 private equity funds.

Its main area of business is leveraged buyout funds, and it has focused its efforts across a broad spectrum of industries, including financial services, travel and entertainment, retail and consumer products, healthcare and biotechnology.

Analysts downgrade

Avon share prices took a pummeling at the start of the year, following a series of downgrades from leading investment analysts, causing the company share price to hit a 52-week on January 6th​.

Just before Christmas, BMO Capital made the boldest statement, downgrading the stock to ‘underperform’ from ‘market perform, while also lowering its price target from $10 to $7.

Meanwhile, Citigroup maintained its ‘neutral’ rating but lowered its price target from $11 to $10, while Piper Jaffrey started coverage of the company with a neutral rating and a $9 price target and Bank of America cut its price target for the company from $12 to $11.

Avon’s revenues cause for concern

For its most recent third quarter, the company turned a loss in the corresponding period last year into a profit, but revenues slipped significantly.

The company made progress in its turnaround bid by posting third quarter net income attributable to the company of $91.4 million, versus a loss of $5.5 million a year earlier.

But the company battled adverse currency translations, posting a total revenue of $2.1 billion for the third quarter, an 8% decrease, but an increase of 1% in constant dollars. Beauty sales declined 9%, but increased 1% in constant dollars.

"We began the year with the expectation that the second half of 2014 would show improvement relative to the first half and Avon's third-quarter results are consistent with modest improvement on both top and bottom line,"​ said Sheri McCoy, Chief Executive Officer of Avon Products.

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