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In the spring, Avon Products Inc. began a strategic review of its business and this week Chief Executive Sheri McCoy got her deal—one in which the beauty company will sell off most of its money-losing North American business.

The transaction with Cerberus Capital Management LP, which would inject $435 million into Avon and carve out the North American business into a separate company with another $170 million investment, buys Ms. McCoy more time to figure out a viable plan for Avon's remaining operations.

"We firmly believe this partnership will change the trajectory of the company," Ms. McCoy said during a conference call Thursday.

Without the financial drag from Avon's U.S. business, the company can position its international businesses "for accelerated growth in beauty and direct selling," she added.

The North American operations contribute about 15% of Avon's sales.

The deal also involves an overhaul of Avon's board. Five directors will be replaced and a Cerberus representative will take over as Avon's chairman. Two other executives from the private-equity firm will take seats on what will be an 11-person board, moves that could leave the CEO vulnerable to an ouster.

Ms. McCoy, 57 years old, has struggled to revive Avon since she took the top job 31/2 years ago. Avon's annual sales have fallen more than 25% since 2011, the year before Ms. McCoy joined the company. Its share price has tumbled 81% since her arrival, and ended down 6 cents Thursday at $4.03 each.

Some former employees and Wall Street analysts have been frustrated with what they describe as a lack of a clear corporate strategy. Inside Avon, Ms. McCoy has been known to say: "I can't tell you what the right strategy is—it's different for every market," according to a former executive.

The transaction, which the company expects to complete in the coming months, makes Cerberus Avon's biggest shareholder, with a 16.6% stake, in addition to owning 80.1% of the North American business. Avon said Thursday it will suspend its dividend to conserve cash, but it will pay a 5% preferred dividend to Cerberus.

The deal was immediately opposed by an activist investor who is part of a group that recently disclosed a 3% stake in Avon. James Mitarotonda, chief executive of Barington Capital Group, said the Avon board agreed to "fire sale" prices and reiterated an earlier demand for a new leader.

"We are astonished that Sheri McCoy remains as CEO," he said. "We intend to explore all available options."

A chemical engineer by training and a former top Johnson & Johnson executive, Ms. McCoy knew little about Avon's direct-sales model when she joined in April 2012. Avon relies on a sprawling network of 6 million representatives to peddle makeup and other products mostly to women.

At the time of her appointment, Avon's sales were already in decline and directors wanted a new CEO who would take a fresh look at the business, according to a person familiar with the matter.

Shortly after Ms. McCoy joined Avon, some directors encouraged her to seek advice about direct selling from her predecessor, Andrea Jung, according to another person familiar with the matter. "That relationship never gelled," this person said.

Ms. McCoy made a series of management changes and focused more resources on a dozen top markets including Brazil, Russia and Mexico. The company closed operations in underperforming countries such as France, Ireland and South Korea, and shed brands including a sterling-silver jewelry line and skin care products.

She also shifted Avon's product mix to include more gifts, accessories and home goods to encourage customers to buy from the company more often because most women don't need new cosmetics that frequently.

But critics and some former employees say Ms. McCoy has been wary of making drastic changes to Avon's business model. The company has been slow to embrace Internet sales and reluctant to try selling some of its products in retail stores because of the risk of alienating sales representatives, say analysts and former employees.

The problem, analysts say, is that representatives aren't selling enough products and their ranks are thinning in many countries as women find other career opportunities that pay better. Some representatives also have been frustrated by supply-chain problems within Avon, which have resulted in delays or mistakes in some orders.

On Thursday Ms. McCoy said the deal with Cerberus will enable Avon to focus on growing its business in overseas markets, which now generate 86% of the company's revenue and all of its profits.

As part of the Cerberus deal, Avon said Oscar Munoz, president of North America and hired by Ms. McCoy from rival Tupperware Brands Corp., will leave in January. Several other executives she recruited to help with the turnaround also recently exited or will exit soon, including two senior vice presidents.

It is unclear how long Ms. McCoy plans to stay in her role and how much support she will have from Avon's board after nearly half its members are replaced. The company plans to hold an investor event on Jan. 21, when Ms. McCoy is expected to provide more details about her growth strategy for Avon.

Last month, Avon said it would broaden the role of its chief financial officer, James Scully, giving him the additional title of chief operating officer come Jan. 1. That move has been broadly interpreted by analysts and company insiders as putting Mr. Scully, a former J. Crew Group Inc. chief operating officer, in line to succeed Ms. McCoy.

"The problem with Avon is that there isn't a clear fix," said Ali Dibadj, a Sanford Bernstein analyst.

Dana Mattioli

(END) Dow Jones Newswires

December 17, 2015 20:05 ET (01:05 GMT)

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