Natura’s board meets as of Wednesday to discuss a reorganization that could spin off businesses into three independent companies

09/14/2022

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Natura made – and acknowledged – several mistakes in the integration with Avon, notably in the remuneration of sales consultants — Foto: Hermes de Paula/Agência O Globo

By abandoning the global dream started a decade ago with the acquisition of Australia’s Aesop, Natura&Co may be giving some respite to investors who have faced massive losses on the stock exchange over the past year, despite the market’s first negative signs.

On Tuesday, the shares plunged again, falling more than 6% after the website Capital Reset reported that Natura&Co plans to concentrate operations in Latin America, abandoning its global platform. Natura’s board meets as of Wednesday to discuss the reorganization, which could spin off businesses into three independent companies.

Natura has already signaled a drastic cut in the holding company’s expenses. In the first conference calls after taking over as CEO, Fábio Barbosa said he had identified measures, which included layoffs, that would allow the holding company to reduce expenses by 40%.

“The holding company was getting heavy,” the CEO said, stressing that there were no decisions on the group’s four major brands – Natura, Avon, Aesop and The Body Shop.

In the view of an asset manager that holds Natura shares, changing the structure of the big brands is the key to improving the return on assets. Therefore, the way stocks reacted Tuesday and the latest reports show that asset management companies are “lost,” with recommendations seemingly outdated.

Contrary to what it may seem, argued a Rio de Janeiro-based asset manager, concentrating business in Latin America is the best decision and has the potential to recover some lost value. Since the peak on July 12, 2021, when the holding company was valued at R$84 billion, Natura plummeted 74%, wiping out R$60 billion.

Natura made – and acknowledged – several mistakes in the integration with Avon, notably in the remuneration of sales consultants, but it is also a fact that a course correction is already underway, with signs of recovery in the results in Latin America.

What would explain, then, the company’s struggle in the stock exchange? One argument is the difficulty in communicating with the market, which hinders analysts’ visibility of the business. But this has also started to change with the hiring of Mr. Barbosa and the change in the investor relations team. Helena Villares, who covered consumption for Itaú BBA, was hired in July.

An investor said that all of Natura’s problems seem to be priced in – even exaggeratedly. Considering the sum-of-the-parts valuation, the company seems cheap, especially at a time when the management team indicates that it may break up the business to create (or recover) value. “The stock is cheap, considerably cheap. It could potentially be worth twice the current price,” another asset manager said.

In a report released Monday, BTG Pactual analysts acknowledged that the asset sale could be a trigger, but pondered that any recovery still depends on a successful restructuring.

Moreover, short-term fundamentals are negative, with margins still pressured and sales weak while rising interest rates continue to weigh on financial expenses. Natura’s leverage ratio (net debt-to-EBITDA) is 3.5 times. “There is little room to improve the bottom line,” wrote Luiz Guanais, Gabriel Disselli and Victor Rogatis.

For those betting that the stock will rise, short-term results – the third quarter will still be bad – cloud the potential of the spin-off. An asset manager reckons that Natura alone is worth between R$25 billion and R$30 billion, considering a reasonable multiple (enterprise-value-to-EBITDA ratio) of 10 times. The company is currently worth R$22 billion.

“The market is placing a negative price tag on The Body Shop, Avon International and Aesop,” the asset manager said. In the restructuring, the spinoff of Australia’s Aesop, a company that shows continuous growth with high margins (16%), would generate value for the business either in a stock exchange listing or in the sale of the business.

Britain’s The Body Shop, however, is a more complicated matter. The business is not growing and suffers from high inflation and the UK’s embattled economy. The company bought for €1 billion from L’Oréal in 2017 is unlikely to reach a similar valuation soon, but Natura can still come out on top by disposing of the asset, one asset manager said.

Avon International’s assets left in Europe face a different situation. Without great chances of being sold, the best alternative for them may be to close loss-making operations around the world, which has already been happening. “The idea is to reduce as much as possible the presence in countries where we continue to operate with losses and, especially, with negative cash flow,” said Guilherme Castellan, Natura &Co’s chief financial officer, in the last earnings conference call.

Even if it concentrates operations in Latin America, where it holds a relevant market share – mainly in Brazil –, Natura’s problems will not be fully solved. The integration between Natura and Avon still generates many cultural problems between both teams, several sources told Pipeline, Valor’s business website.

Among employees who already knew Natura, the arrival of Avon represented a blow – including in their bonuses – and many consider that the merger has worsened the company and work. On Avon’s side, the pressure for results is increasing, which causes employees to leave.

Last month, for example, Avon’s chief marketing officer Danielle Bibas left after nearly 13 years at the company. And Diego Santelices, one of the executives who headed Avon’s successful sponsorship of the reality television show Big Brother Brasil, decided to leave the company for Electrolux, a household appliance manufacturer.

“Avon’s team feels very insecure. Since Natura bought it, there have been several cuts. My boss was fired and can’t even say goodbye to the employees,” a source said. In the outplacement consultancies financed by Natura, “every appointment has a new [former] Avon [employee].”

While dealing with the cultural frictions of integration of this size, Natura has also decided to transfer the whole Avon administrative body – around 600 people – from Interlagos (in the south zone of São Paulo) to Natura’s headquarters on the other side of the city. The change is expected to materialize in early October.

Natura did not immediately reply to a request for comment.

The original story in Portuguese was first published on Valor’s business website Pipeline.

*By Luiz Henrique Mendes, Raquel Brandão — São Paulo

https://valorinternational.globo.com/