Avon-Cerberus Investment Could Signal Cash Flow 'Uncertainty,' Analyst Warns

• Avon Products, Inc. AVP shares have declined 56.34 percent year to date, with the share price declining almost to the 52 week low on November 13, at $2.50.
• B. Riley analysts have maintained a Neutral rating on the company, with a price target of $3.30.
• The analysts expect the Cerberus investment to be 15 percent dilutive, while 35 percent of the proceeds being used for debt reduction could indicate uncertainties regarding future cash flows.

According to the B. Riley report, “As widely anticipated, on 12/17, AVP announced an agreement with PE firm Cerberus, for Cerberus to make a $435MM investment in AVP in the form of convertible perpetual preferred stock with a conversion price of $5.00/share and a cash coupon that accrues at 5 percent per annum.”

The means that Cerberus would gain 16.6 percent ownership stake in Avon Products, while the deal would add 86.6 million shares to the diluted shares outstanding. This in turn is expected to lead to EPS decline of about 15 percent, including repayment of debt worth $250 million with some of the proceeds.

In addition, Avon North America will be separated from Avon Products to create a private company that would be 80 percent owned and managed by Cerberus. Avon North America would take on long term liabilities from Avon Products worth $230 million, partially offset by a $100 million cash contribution from the parent company.

“AVP also announced it will suspend its $100 million cash dividend, and that 6 board members are stepping down, with 3 Cerberus executives to join and 2 new independent directors to be jointly selected by AVP and Cerebrus,” the report mentioned.

Avon Products plans to take on restructuring and cost reduction initiatives, beginning 2016, to help improve its cash flow and repay its debt complex in 2018 and 2019.