Benefits and perils of Natura’s purchase of Avon

Brazilian cosmetics giant Natura has finally announced its acquisition of Avon, making it the world’s fourth-largest pure player in the cosmetics sector—stretching its reach across more than 100 countries. Linking Natura & Co. and Avon creates a behemoth with revenue of USD 11 billion and analysts are now focusing on how this integration will develop—and whether it will be enough to increase the company’s profitability.

Natura shares traded on the São Paulo stock exchange (NATU3) slid 7.8 percent on Wednesday afternoon, after an overwhelmingly positive first-response to the deal. The company was the best-performing share on the Ibovespa index yesterday, closing the day up 9.43 percent. According to Eduardo Guimarães, stocks analyst at Levante Investimentos, the sudden rise was exaggerated and left little room for upside—at least while the holding company doesn’t present better outcomes.

“Natura’s leverage will increase. Maybe they will have to negotiate their covenant [the rule in the company’s regulations that limits the debt levels]. I think yesterday’s performance was too much, I...