Synergies From The Avon-Natura Merger Could Unlock More Than $1 Billion In Value For Shareholders

After the announcement of its merger agreement with Natura Cosmeticos, shares of Avon Products (NYSE:AVP) have gained nearly 40% in value. The deal is expected to increase Avon’s operational efficiency and expand Natura’s global footprint. Trefis details the structure and potential valuation for the merged Avon-Natura entity in the interactive dashboard What Will The Combined Avon-Natura Entity Look Like, And How Much Could It Be Worth? Additional details about the deal can be found in our dashboard, Avon & Natura: What’s The Deal?

The Different Merged Segments

Avon Products operates through four geographical segments, North Latin America, South Latin America, EMEA, and the Asia Pacific. To know more about each segment’s performance, view our article: A Closer Look At Avon’s Global Operations, And What’s In It For Natura?

Natura Cosmeticos operates five segments, Natura Brazil, Natura LATAM, The Body Shop, Aesop, and Natura Others. Natura Brazil has the highest contribution of 45% of the total revenues and it is followed by LATAM and The Body Shop, respectively. Natura’s revenues observed strong growth in 2018 primarily due to the acquisition of The Body Shop in late 2017.

The merged entity, Natura Holdings, will very likely have four reporting segments:

• Natura Holdings Latin America: It would be the largest segment with net revenues of $5.4 billion in 2019 and a share of nearly 60% of the combined revenues. The total cosmetic market of Latin America was around $20 billion (per L’Oreal) in 2018 and a 25% share of it would make Natura Holding the leader in the region. Such a strong presence for Natura in its native market could potentially reduce overheads in Avon’s operations. The global cosmetic industry grew by 5.5% in 2018 and as the challenging macro-economic situation continues in Latin America, we expect the combined revenues of the segment to grow at 2% in the coming years.
• Natura Holdings Other Regions: The rest of the world operations of Natura Holdings would be the second largest segment, thanks to the global footprint of Avon Products. Although the segment would contribute 27% of total revenues its profits are likely to be hurt in the near future due to Avon’s declining sales and expected restructuring costs. We expect Natura Holdings’ international operations to grow by a modest 1% over coming years.
• The Body Shop: Its revenues had been falling under L’Oreal since 2014 but it has remained above $1 billion the last three years. Natura is expanding The Body Shop’s reach through its direct-selling consultants and we expect revenue growth to remain strong driven by Natura’s transformational efforts.
• Aesop: It is a luxury skincare brand that was acquired by Natura in 2012. Over the last three years, it has observed double-digit sales growth driven by new store openings across the globe. We expect this growth to continue in the coming years.

Quantifying Operational Synergies, And Their Impact On Valuation

The management of both companies expect operational synergies of $150 – $250 million annually, primarily in Brazil and Latin America region. Additionally, a one-time cost of $125 million is expected over the next three years.

Few additional data:

1. Through its Open-Up Avon strategy, Avon’s management expects to reduce $400 million in overheads to stimulate growth in the next three years.
2. Restructuring and global overheads cost Avon nearly $400 million annually and have been the reason for its poor profitability. We expect Open-Up Avon to have a negligible impact on global overheads.
3. We expect Natura Holdings to achieve $150 million in annual cost savings due to its strong presence in the Latin America region.

Using these assumptions in our interactive dashboard for the merged Avon-Natura entity, we estimate that Natura Holdings’ shares would be worth about $16.50 now. This works out to a valuation of $9.3 billion for the merged entity, which is almost $1.3 billion higher than the $8-billion figure obtained by combining the current market cap for Avon ($1.7 billion) and Natura ($6.3 billion).

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