What happened?

Brazilian firm Natura SA said on Wednesday it had reached an agreement to buy rival Avon Products Inc. via a share swap (0.3 Natura share for each Avon share).

Why is it important?

In general

The deal will lead to the formation of the world’s fourth-largest beauty company with a strong focus on direct sales and such big brands in its portfolio as The Body Shop.

For investors

The consolidation with its former competitor will solve some of Avon’s problems. During recent years, the firm hasn’t had the best of times. For instance, in 2015, it had to sell its US operations because of low demand. Since then, the company has turned to other markets, Brazil included. Still, the latest developments weren’t great either. To reduce spending, Avon decided to lay off 10% of its employees. In Q1, its seller base contracted by 9%. All in all, Avon has been missing industry trends and lacked good management.

Notice that Avon and Natura have similar business models so that it will be easy and natural for them to come together. The synergy effect will be achieved by cutting costs and eliminating mutual rivalry. Natura does have plans on how to revive Avon’s brand. As a result, there’s real hope now that the quality of Avon as an asset will improve.

The transaction should be approved by Natura and Avon shareholders, as well as the regulators. If all goes well, the deal will be concluded at the start of 2020.

For traders

Avon stock has been trading within a long-term downtrend since the global financial crisis of 2008. Since the start of 2019, it has been trying to recover. This week the price broke above the range in which it has spent the past couple of months. The close above $3.50/40 (38.2% Fibo of the 2016-2018 decline and 200-week MA) will give it a chance to try for higher levels at $4.15 and $5.

The weekly chart of Avon Products Inc.
Avon Products Inc., weekly chart

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