Avon 2015 Annual Report Download - page 7

Dear Shareholders,
Exiting 2014, we assessed the state of Avon’s business—this included an in-depth review of
both our operational progress and the external economic environment. Despite the progress
made, it was clear that Avon was facing significant macro headwinds and needed improved
financial flexibility. At the same time, the North America business recovery was taking longer
than previously anticipated. The path forward for Avon needed to be redefined. It was critical
that we complete this work quickly and thoroughly, while not losing sight of the mission and the
values that have made Avon an iconic company.
We embarked on a journey to define this new path for Avon—one that would provide a solution for
the North America business, allow us to better drive growth in international markets, and improve
our financial flexibility. The urgency of this journey was amplified by the macro headwinds we
endured in 2015. As it turned out, the foreign currency pressures we faced in 2015 were beyond
the magnitude that we—or anyone—had predicted, with several major currencies taking an
unprecedented drop compared with the U.S. dollar. In 2015 alone, Avon experienced negative
currency impacts on operating profit, when compared with 2014, of nearly half a billion dollars.
We conducted an exhaustive review of our strategic options, and the path we charted includes
the bold steps necessary to drive greater shareholder value.
The options considered by our Board ranged from continuing to operate the Avon business as
is, to strategic partnerships, to radical shifts in channel and structure, and many variations in
between. We discussed options with potential partners in direct selling, consumer packaged
goods, and retail as well as other private investors. We received broad and diverse interest,
and the options were narrowed down to the most attractive proposals, both strategically and
financially. On December 17, 2015, after a thorough due diligence process, we announced a
strategic partnership with Cerberus Capital Management, L.P. We closed the transaction on
March 1, 2016.
This partnership includes the separation of Avon’s North America business into a privately held
company that is majority-owned and managed by Cerberus. Cerberus has invested $170 million
for an approximate 80% ownership interest of the North America business, which now operates
as New Avon LLC. Avon maintains an approximate 20% interest in the North America business.
Avon has the opportunity to benefit from the upside of the substantial investment that Cerberus
is making to reinvigorate the North America business in a private setting with good potential to
return the Avon North America business to sustainable growth.
Cerberus also invested $435 million in Avon Products, Inc. in exchange for an ownership interest
of approximately 16.6%. Avon Products, Inc., comprised of the remaining international markets,
continues to trade on the New York Stock Exchange under the ticker symbol AVP.
This is a true partnership with Cerberus, intentionally structured so that we are each vested in
one another’s success.
The capital infusion from Cerberus, the suspension of the dividend, and additional operating
efficiencies from our recently announced transformation plan are expected to provide us with
the needed financial flexibility to implement operational and capital plans that fully support
the international business. Cerberus also brings significant operational expertise to help us to
execute our plans.