Avon Hit by SEC as Brazil Boom Seen Luring Bid

Peddling lipstick and lotion in Brazil and Russia has never been more attractive to potential buyers of Avon Products Inc. (AVP)

Avon, reeling from its biggest drop in more than a decade after saying the U.S. Securities and Exchange Commission began investigating it for possible bribes to foreign officials, is now valued at 9.6 times profit, according to data compiled by Bloomberg. That’s cheaper than any cosmetics maker in the world and an almost 50 percent discount to the industry’s average.

Putting the world’s largest door-to-door cosmetics seller up for sale would help Chief Executive Officer Andrea Jung recoup some of the money Avon’s owners lost in the past three years as companies in the industry gained 65 percent. While Avon has been less profitable than Estee Lauder Cos. and L’Oreal SA (OR), Solaris Group LLC and Bahl & Gaynor Inc. say buyout firms or activist investors could target a company that analysts project will have record sales in 2011 as emerging-markets demand rises.

“The company has not been operating on all cylinders recently,” Timothy Ghriskey, who oversees $2 billion as chief investment officer of Solaris Group in Bedford Hills, New York, said in a telephone interview. Avon “has value and is selling at a valuation that is extremely attractive. It could easily attract some buyers,” he said.

Jennifer Vargas, a spokeswoman for New York-based Avon, declined to comment on rumors or speculation.
Skin So Soft

Avon, with a market value of $7.7 billion, sells cosmetics from Glazewear lip gloss to Skin So Soft body lotion and SuperShock mascara directly to customers using 6.5 million independent contractors in more than 100 countries.

Shares of Avon, which closed at $17.84 yesterday, plunged 18 percent on Oct. 27 after the company said the SEC began investigating its international operations and issued a subpoena seeking information about communications with analysts starting last year. Avon said it is cooperating with the SEC’s probe.

The company in 2008 started investigating its Chinese operations’ compliance with the Foreign Corrupt Practices Act, which outlaws bribing foreign officials. That led to the firing of four executives in May, and Avon expanded the probe to other developing countries.

In the past three years, Avon has fallen 29 percent under 53-year-old Jung, the biggest decline of 13 cosmetics makers globally, data compiled by Bloomberg show. Avon, which also said last week that it no longer expects to meet its forecast for sales growth this year, has reported earnings that have fallen short of analysts’ estimates in four of the last five quarters.
Management Responsibility

The declines have made Avon the cheapest company in the cosmetics industry, which includes Estee Lauder and Revlon Inc. (REV) of New York, and Paris-based L’Oreal.

With a price-earnings ratio falling below 10 times, Avon is also selling for less than at any time since 1991, excluding the months following Lehman Brothers Holdings Inc.’s bankruptcy in September 2008.

“The stock price tells me they’re in trouble,” Yemi Oshodi, managing director of M&A and special situations trading at New York-based WallachBeth Capital LLC, said in a telephone interview. “Almost every other company has recovered. Any problems that this company is facing right now have to be directly related to the management team.”

While Avon’s operating profit margin still lags behind its larger competitors, the company’s growth in emerging markets makes it an attractive target, according to Bill Kavaler, New York-based special-situations analyst at Oscar Gruss & Son Inc.
Selling to Women

Avon generated 42 percent of its revenue last year from Latin America, twice as much as in North America, data compiled by Bloomberg show. Led by Brazil, its biggest market, Latin American sales have climbed 39 percent in the past three years, four times faster than Avon’s overall growth.

In the past decade, Avon has almost doubled its sales force in Brazil to about 1.2 million, according to Credit Suisse Group AG. That’s almost three times as many sales representatives as Avon has in the U.S.

“They have a sales force in emerging markets that understands how to sell cosmetics directly to women,” said Oscar Gruss’s Kavaler, who cited L’Oreal as a potential buyer. “If you can buy a distribution platform relatively cheaply that allows you to improve your scale and distribution quickly, that’s absolutely the way to go.”

Rebecca Caruso, a New York-based spokeswoman at L’Oreal, the world’s largest maker of cosmetics, declined to comment on whether it is considering a bid for Avon.
‘Plenty of Runway’

Avon could also entice private-equity firms and activists that may seek to boost shareholder returns by pushing for management changes, according to Matt McCormick, a manager at Cincinnati-based Bahl & Gaynor, which oversees $4.1 billion.

“Avon shareholders are probably frustrated with not only recent, but past performance and would be open to someone to unlock value,” McCormick said in a telephone interview. “There’s a lot of potential opportunity here. If you’re a shareholder, you’re open to new suggestions.”

Avon’s 39 percent decline this year is the biggest among 42 companies in the Standard & Poor’s 500 Consumer Staples Index. Estee Lauder has posted the third-biggest gain in the gauge during the same period, advancing 25 percent.

The retreat so far this year matches Avon’s swoon in all of 2008, when the company suffered its biggest annual decline since at least 1974, data compiled by Bloomberg show. This year’s slump has made Avon a bargain, according to Rommel Dionisio, New York-based analyst at Wedbush Securities.

“You’ve got a global stalwart brand name, distribution all over the world, especially a strong presence in emerging markets,” Dionisio said. “There’s plenty of runway left in the world where direct selling can grow.”