Shares of Avon (AVP, $3.59) surge as Natura finalizes an all-stock deal

Shares of Avon Products surged almost 12% on Wednesday as Brazilian cosmetic maker Natura Cosmeticos SA moved another notch closer to acquiring the U.S. company via an all-stock deal to unite two of Brazil’s most popular makeup brands. This will likely move Natura closer to its goal of being a global player.

In the said deal, Natura would become the majority shareholder in the 133-year-old U.S. group, which has a market capitalization of about $1.4 billion and is most popular for its direct sales model.

Following the news of the deal, Avon shares were up 11% bringing their rise this year to 137%. On the other hand, Natura accumulated a 32% rise this year.

Two years ago, Natura acquired The Body Shop from L’Oreal for nearly $1 billion. But it may face challenges with Avon which has a strong foothold in Brazil and other parts of Latin America.

But Natura is pursuing to become a global brand and would need to invest in the Avon brand in Brazil and may also need to invest in its logistics, besides reviving The Body Shop brand.

According to the deal structure, Avon would have around 80% of the combined entity and Avon is currently valued at $2 billion. In keeping with such a valuation, the combined entity will have earnings of $3.35 billion. The deal will not involve any cash payments and will allow Natura to avoid further influence after it clears The Body Shop deal through debt. The new company would have debt equivalent to 3.7 times its annual EBITDA, which is moderately high.