This article is part of a Real Money series on 20 companies investors should consider adding to their distressed watch list.
Many Avon Products (AVP) shareholders were foolish to dump the beleaguered stock when it dipped in December, but Cerberus Capital was right on the money.
The New York private equity firm said on Dec. 17 that all the fragrance and cosmetics maker needs -- which had been spewing cash amid an ugly earnings skid -- is a $435 million cash injection to commence a meaningful turnaround. (Avon is a member of Real Money's 20-member 'Stressed Out' watch list.)
Avon shares at first dipped 41% from December into mid-January off news of the Cerberus cash injection, but have since rebounded 84% as of Monday afternoon trading. In exchange for the $435 million, Cerberus took an 80% stake in Avon's North America businesses, now called New Avon LLC. The remainder is held by the existing corporation. In addition to the profits the prevate-equity firm is taking from the North America unit, Cerberus CEO Steve Feinberg recently disclosed a nearly 17% stake in the public company, along with an associated investment group in a March filing with the SEC.
Avon used the investment to pay off $250 million of its then $2.3 billion debt load, and used the remainder largely to help offload a hefty amount of liabilities onto the North America unit. And perhaps the greatest benefit, is settling the year with nearly a billion of cash including the transaction proceeds, according to CEO Sheri McCoy.
"Our strategic partnership with Cerberus sets Avon on a solid path to profitability and growth by providing a solution for the North America business as well as capital, focus, and resources to support Avon Products, Inc. in the execution of our transformation plan," McCoy said in a March statement, upon the deal's closure. "The partnership, along with other actions we are taking, also further increases our financial flexibility. We have significant capital resources and liquidity with which to fund working capital, restructuring costs, and opportunistic debt retirement."
The Deal: Cerberus to take stake in Avon, buy North American operations for $600M
Notable bright spots on the year include the improved liquidity position and a debt pay-down to $2.2 billion from $2.6 billion, year over year.
Sterne Agee analysts recently upgraded Avon's annual earnings guidance in a late-February report to $0.29 per share from $0.18, primarily citing benefits from the sale of the North America unit.
"2016 will be a transition year," Sterne Agee's April Scee and Theo Brito said in the report. "With sale of North America to Cerberus, re-constituted core should gradually improve throughout year behind incremental second-half pricing, moderating foreign-exchange pressure, and growing cost savings. We forecast about 2% organic topline growth and operating margin flat to slightly up."
Stressed Out: Introducing Real Money's Distressed Index
Stressed Out: AK Steel Leads Surging U.S. Steelmakers
Stressed Out: Sprint Is Collapsing Under the Weight of Its High-Yield Debt
