Markets

Why Avon Products Stock Popped 10% on Wednesday

What happened

Avon Products (NYSE: AVP) is rocking, up 10.6% as of 1:45 p.m. EDT, on reports -- now confirmed by the company -- that Brazil's Natura Cosmeticos has agreed to acquire it in an all-stock deal valued in excess of $2 billion.

Britain's The Financial Times broke the story this morning, reporting that the Sao Paulo-based owner of The Body Shop chain has been negotiating "for several months" to acquire Avon (whose stock has more than doubled this year on those rumors), and has finally struck a deal.

Fish of varying sizes eating each other.

Image source: Getty Images.

So what

Details on the acquisition are still firming up. Commenting on FT's report, Avon said only that discussions are "advanced" and it envisions an "all-stock transition" -- but cautioned that "there can be no assurance any transaction will result from these discussions."

Now what

Investors seem optimistic. With Avon's share price still short of $1.6 billion in market cap, a $2 billion buyout price would appear to leave some upside, even if a deal is not yet set in stone.

One quirk that needs to be kept an eye on, though, is FT's observation that Natura will end up owning only 76% of Avon as a result of this transaction. Depending on how this observation is explained by the facts of a deal (if any), 76% of $2 billion would be $1.52 billion -- almost exactly the price that Avon stock is valued at today -- leaving little upside remaining for new buyers.

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Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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