After losing $3 billion in market value since its last known suitor walked away, Avon Products Inc. may be more willing to open its door to potential buyers.

Avon’s board in March recommended shareholders vote against a proposal to limit golden parachutes for management fired in connection with a sale. That could be interpreted as a sign the board is open to a deal if Chief Executive Officer Sheri McCoy’s turnaround efforts fail to revive the $6.2 billion company, said B. Riley & Co. After two years of losses and a $500 million bill to clean up bribery charges, Avon is trading 42 percent below the $24.75-a-share bid from Coty Inc. in 2012.

“That is an indication that the board thinks that it might have to sell the company and so it doesn’t want any hurdles in the way,” Linda Bolton Weiser, a New York-based analyst at B. Riley, said in a phone interview. A sale “is going to have to be their next choice.”

While Avon was reluctant to negotiate with Coty at the time of its offer, Morningstar Inc. said the door-to-door cosmetics seller may warm to a deal if it continues to stumble. Tupperware Brands Corp. also could be interested in Avon for its strong presence in the Latin American beauty market, Weiser said. A private-equity suitor lured by Avon’s cash flow potential may be able to extract value by divesting the shrinking North American operations and re-domiciling it in a country with a lower tax rate, said Pekin Singer Strauss Asset Management Inc.

“There’s been years of strategic mishaps, poor execution,” Joshua Strauss, Chicago-based co-manager of the Appleseed Fund at Pekin Singer Strauss, which oversees about $1 billion including 1.4 millionAvon shares, said in a phone interview. “I don’t think management would necessarily reject that opportunity to no longer be a public company.”


Shareholder Proposal


A representative for New York-based Avon declined to comment on whether the company would be open to a sale.

In a proposal submitted for consideration at Avon’s annual meeting, Amalgamated Bank’s LongView LargeCap 500 Index Fund asked the board to prohibit accelerated vesting of equity awards for senior executives if they are fired after a change in control. The shareholder advocated for the benefits to be pro- rated to prevent “windfall awards.”

Avon’s board responded by saying its compensation plan is appropriate and helps “align executives with shareholder interests.” Stock owners agreed and voted against the proposal last month.


Management Incentives


Investors tend to favor accelerated vesting, a type of “golden parachute,” because it encourages executives to remain neutral and actively cooperate in a takeover, even if a deal means losing their jobs, said Erik Gordon, a professor at the Ross School of Business at the University of Michigan.

While the board’s stance doesn’t mean a sale is imminent, “you’re leaving the door open for a deal by not putting up a roadblock that would keep the CEO from doing a deal,” James Angel, a professor of finance at Georgetown University, said in a phone interview. “Essentially what you’re doing is incentivizing the CEO to get the best possible deal for the shareholders.”

Avon rejected a $10 billion takeover bid from Coty in April 2012, saying it undervalued the company. While Coty sweetened its offer the next month to $10.7 billion, or $24.75 a share, it withdrew it a few days later, citing Avon management’s “unwillingness to engage in discussions.”

The Avon board may want to reconsider a sale if CEO McCoy’s efforts to cut costs and exit unprofitable markets aren’t enough to turn the company around, said Weiser of B. Riley. Since Coty withdrew its offer, Avon shares have never exceeded $24.75, and last month they dropped to $13.30, the lowest in 14 years.


Avon Performance


Avon hasn’t posted a profit since 2011. In emerging countries, the expansion of traditional retail stores and online shopping is eroding the market for direct selling, and in developed nations, business is drying up. The company also recently agreed to settle a six-year probe into corrupt payments. A subsidiary in China will also plead guilty.

“There have been glimmers of hope in their results, but there hasn’t been sustainable improvement -- that’s what’s been missing,” Erin Lash, a Chicago-based analyst at Morningstar, said in a phone interview. A sale “could be an avenue for the firm to explore” if it continues to face challenges.

Don’t count out Coty as a possible buyer either, she said. The two companies announced an agreement May 14 to sell some Coty fragrances through Avon’s Brazil sales network, which may signal a thawing of any animosity.

“It’s not unheard of that something like that could happen,” Lash said of a potential deal redux. “There are still some benefits to the direct-selling platform. Those are benefits that might appeal to a potential buyer.”


Direct Selling


Tupperware, the direct seller of household containers, could also be interested, said Weiser of B. Riley. The $4.2 billion company got 26 percent of its sales last year from beauty and personal-care products, although its growth in that category in Latin American markets such as Brazil has been slow, Weiser said.

“Beauty is proving harder to crack for them,” she said. “Avon would give them that.”

Estee Lauder Cos., the $29 billion cosmetics giant, is also due for a deal. The company is on the verge of its longest stretch without a purchase in at least 19 years, according to data compiled by Bloomberg.

Representatives for Orlando, Florida-based Tupperware and New York-based Estee Lauder declined to comment. A representative for New York-based Coty didn’t respond to a phone message seeking comment.


Private Benefits


Avon’s cash-flow potential is “huge” and it’s trading at a “trough level,” making it a candidate for a buyout, said Strauss of Pekin Singer Strauss.

Avon trades at a cheaper multiple of free cash flow than 92 percent of personal-products companies valued at more than $1 billion, according to data compiled by Bloomberg. The company generated $360 million of free cash flow in the last 12 months.

“For a private-equity firm, this is a good business,” Strauss said in a phone interview, estimating a financial buyer could make a deal work with a bid of about $20 a share, a 40 percent premium.

A private-equity suitor could close down Avon’s money- losing North American operations and then re-domicile the company in a lower rate country such as Ireland to cut its tax bill and free up overseas cash, he said. Avon also would be able to carry out its turnaround away from the eyes of the public market.

“You need to take painful actions first before you fix it,” said Weiser of B. Riley. “That’s difficult to do and the Street is seeing these terrible financial results. That would be better done as a private company.”


No Sense


Not all buyers will have the “strong stomach” needed to acquire Avon, Ali Dibadj, a New York-based analyst at Sanford C. Bernstein & Co., said in a phone interview.

“If you try to buy Avon, what do you get?” Dibadj said. The business “can be improved but it’s secularly declining. I’m not sure it necessarily makes sense for anybody at this stage to pick it up.”

While Coty had been attracted to Avon’s distribution system in emerging markets, the companies’ fragrance marketing agreement this year may satisfy that need, Dibadj added.

Even so, the Avon board’s support of incentives for management in the event of a takeover means the company is at least keeping a sale an option, said Gordon of the University of Michigan.

“It’s a sign that the board doesn’t want to make an acquisition of Avon less likely if one ever appears on the horizon,” he said in an interview. “The board has a responsibility to do what’s best for the shareholders, which might someday include selling the company.”

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