- Natura Cosméticos S.A. is emerging as a global cosmetics powerhouse from Brazil to China and is acquiring Avon Products Inc.’s non-U.S. business for $2 billion to cement its global reach
- The deal will allow Avon investors to trade their ownership in a fading business for a big stake in a growing global champion at a discount
- Investors buying Avon at $3.86 get a 15.4% discount on post-merger Natura based on latest closing prices
- One way to think about the deal is a U.S. initial public offering of Natura that brings along valuable synergies and savings
Natura Cosméticos S.A. is emerging as a global emerging markets powerhouse in the cosmetics world and its latest acquisition of Avon Products Inc.’s business outside of the U.S. is a smart way to consolidate its home market and cement itself in the industry’s top ranks.
Given that Natura’s shares trade in Brazil, the takeover of Avon provides investors a route to bet on this compounding global grower at a discount via merger arbitrage. By purchasing shares in Avon Products today at $3.86, they get a 15.4% discount on Natura shares post-merger because the all-stock deal gives 0.3 Natura shares for each Avon share. Once the merger is completed early next year, the combined Natura-Avon will trade in both Brazil and in the U.S.
One way to think about the deal is a U.S. initial public offering that brings along valuable synergies and savings. Rather than offering fully-priced new shares to prospective U.S. investors, they are offering the shares at a discount along with $150 million to $250 million per year in cost savings.
Because Natura and Avon compete with a similar business model in Brazil and the rest of Latin America, they will be able to cut most costs there. Avon owners have long been disappointed with the company’s performance in emerging markets, particularly, Asia, where Avon got just 10% of revenue and has exited markets like Thailand and Australia.
Natura, by contrast, has grown aggressively across the globe, acquiring Aesop in 2013 and The Body Shop in 2017. Combined, the two companies will jump from outside the top 10 to the fourth largest global pure-play cosmetics group with a combined $10.9 billion in annual revenue. It leapfrogs rival Coty and puts Natura in the same league as Shiseido and Estée Lauder. L’Oréal S.A. remains the industry giant in terms of revenue.
The combination makes a lot of sense in terms of building scale and reducing overlaps in companies with a similar organizational structure and footprint. Avon, which has struggled of late but boasts a network of salespeople that sell its products door-to-door, would give Natura more brands to sell both direct-to-consumers and in its Body Shop store network. Avon shareholders gain a globally savvy, aggressive management team with a far superior growth profile.
Still, the deal has to close for these benefits to materialize. Brazilian entrepreneurial companies like Natura have been welcome buyers of assets in the U.S. For example, Brazilian private equity firm 3G Capital has been allowed to buy the iconic Budweiser beer business and both Kraft and Heinz consumer brand portfolios. Based on that precedent, regulatory hurdles to such a takeover should be minimal and procedural in nature. This deal is very far removed from the recent trade spat between the U.S. and China, which has put extra scrutiny on Chinese buyers of U.S. brands.
In short, investors are trading in an old Ford Fusion for a new Ferrari. The old model, Avon, was a cheaper stock given it isn’t turning a profit while Natura trades at a 50x price-to-earnings multiple. While overvaluation is a risk in the deal, it seems Natura has the power to crank up earnings from the synergies of this deal and its revamp of The Body Shop is underway.
Going forward, investors should focus on the value of Brazilian-listed Natura given the all-stock nature of the deal. How Natura’s shares trade will determine the ultimate value of their investment in Avon. As of Tuesday’s close, Natura’s shares traded at 61.36 Brazilian Real ($15.24 per share). Based on one Avon share being exchanged for 0.3 Natura shares, that gives Avon shares a value of $4.57 each. Although those prices will fluctuate, that’s an 18.4% return for investors if that valuation gap closes and a deal is completed.
In short, investors should consider buying Avon shares to get exposure to a growing global champion that is taking the steps Avon shareholders wished its management could have executed long ago. Now, trading in their shares for a brighter future with Natura seems like the sensible move. That decision is made even easier by the opportunity to get a discount by buying today – before the merger is completed.
John Jannarone, Editor-in-Chief