Avon Concludes Deal With Cerberus

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In December 2015, Avon Products Inc. (NYSE: AVP) announced an investment agreement with affiliates of Cerberus Capital Management that would inject some $600 million into the struggling cosmetics maker. The second part of the two-part deal was closed Tuesday.

Through an affiliate, Cleveland Apple Investor, Cerberus paid $435 million in cash for 435,000 newly issued Series C preferred stock in Avon. In exchange, Cleveland Apple gets three seats on Avon’s board of directors, one of whom has been appointed chairman. The number of board members was reduced from 12 to 11 on March 1. Six board incumbents have been retained and two new, independent directors will be appointed jointly by Avon and Cleveland Apple.

The agreement stipulates the number of board seats Cerberus is entitled to if it reduces its stake below 75% of its initial number of Series C shares. The agreement also spells out certain other rights for Cleveland Apple:

Subject to maintaining certain levels of beneficial ownership of Series C Preferred Stock and/or common stock, Cleveland Investor has consent rights over certain actions taken by the Company, including increasing the size of the Board, reinstating the Company’s quarterly common stock dividend and incurring indebtedness in excess of certain thresholds. Subject to maintaining certain levels of beneficial ownership of Series C Preferred Stock and/or common stock and certain other factors, Cleveland Investor is required to vote its shares of Series C Preferred Stock and common stock in favor of (i) each director nominated to the Board, (ii) the Company’s “say-on-pay” proposal and any other approved equity compensation proposals and (iii) ratification of the Company’s independent registered public accounting firm.

Cleveland also has entered a stand-still agreement as long as it maintains ownership of a specified amount of Avon stock.

Avon sold 80.1% of its North American business to Cleveland Apple/Cerberus in December for $170 million. The new agreement also grants New Avon a license to certain intellectual property that Avon used to market its products prior to the sale.

Avon’s shares closed at $4.23 on Monday, in a 52-week range of $2.21 to $9.47. Since Avon’s deal with Cerberus was announced on December 17, the stock posted its 52-week low in late January and has bounced back to a level just 2.4% below its share price on that date. The consensus price target on the stock is $4.48.