Avon’s chairman is set to open dialogue with Barington after refusing for months to to engage with the activist shareholder, which is demanding management changes and cost cuts.
Monday’s planned telephone conversation between James Mitarotonda of Barington Capital Group and Avon’s Douglas Conant comes as potential suitors including private equity firm Cerberus Capital are circling around the cosmetic group’s North American business.
Barington — which leads an investor group that owns more than 3 per cent of Avon’s shares — is opposed to selling off that business at too low a price. It argues that with the right leadership Avon could boost margins and increase revenue. Since Sheri McCoy took over as chief executive in early 2012, the share price has tumbled 82 per cent, shrivelling its market capitalisation to $1.84bn.
“We had attempted to speak with management for a significant amount of time but they have been unwilling until now to schedule a meeting,” said Barington’s Mr Mitarotonda in an interview.
The call comes after Barington last week made public a letter outlining how replacing management and cutting between $500m-$700m in costs would increase annual profits per share to 90 cents from 2014’s loss of 88 cents.
The activist fund, which launched in 2000, has spearheaded other high-profile campaigns including last year’s changes at Darden Restaurants.
Barington said the letter had prompted supportive messages from a number of unnamed shareholders, including former employees, who expressed their frustration with the company’s performance and lack of transparency.
Mr Mitarotonda said: “This board has been complacent and presided over a number of years of value destruction. We think shareholders are very disappointed with the management team. They want to see change.”
Barrington is working with NuOrion Partners, a fund founded last year by Guy Phillips, a former head of consumer and retail investment banking at UBS.
Avon declined to comment beyond the statement issued last week after Barington made its letter to the chairman public. At that time, the company said that it “welcomes open communication with and feedback from our shareholders” and that it “looks forward” to continuing its dialogue with investors.
The future of the New York-based group, which over the past near 130 years has been selling make-up, fragrances and skin care through its door-to-door “Avon Ladies”, has been up in the air for years.
Early in her tenure, Ms McCoy rebuffed a $10.7bn offer from fragrance maker Coty and soon after promised to cut $400m in costs, deliver “mid single-digit constant-dollar revenue growth” and a “low double-digit operating margin” by 2016.
Instead, this year’s third-quarter sales dropped 2 per cent, excluding the effects of a strong dollar (22 per cent including dollar impact), while its operating margin was 1.4 per cent. Barington believes margins should be about 14-15 per cent.
Avon has been criticised for its failure to capitalise on the fast growth in ecommerce, unlike rivals such as Revlon and Estee Lauder, as well as the lack of a strategy that utilises bricks-and-mortar retailers. While its door-to-door expertise has served it well in emerging markets such as Brazil and Russia, its profits have been pummelled by the strong dollar.
Meanwhile, Avon paid $135m to settle allegations of bribery in China in 2014.
Avon put its North American business, which accounts for 13.6 per cent of overall sales, on the block in April as part of a strategic overhaul. Last week, people familiar with the situation said Cerberus was the most serious of a number of investors interested in acquiring the business.
However, Barington said it would not add value for shareholders to dispose of the North American business now at a “fire sale” price. It said that while the division has a dwindling contribution to overall sales, it is important to have a strong foothold in the US market and develop a better strategy that would add value to the business.
“We think the North American business could be improved and would be very very valuable. A sale at a fire sale price would not be good for shareholders,” said Mr Mitarotonda.
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