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Executive Summary

Avon's move to divest Mallinckrodt is in line with Chairman Hicks Waldron's plan to focus Avon's long term health care efforts on the consumer products and service segments of the industry. Avon originally purchased Mallinckrodt as a stepping stone into the high growth, non-cyclical health care industry. Avon's interest in health care expansion has since shifted to a consumer-oriented, services business embodied by Foster Medical, a home health care firm. As a manufacturer of critical care products and chemicals, Mallinckrodt does not fit that strategy. The 1982 purchase of Mallinckrodt for approximately $715 mil. marked the beginning of Avon's diversification from beauty products into chemicals and health care. In divesting Mallinckrodt, Avon is relinquishing a profitable business with higher margins than the core cosmetics business. In 1984, the division's sales were $540.6 mil., with operating profits of $81.9 mil. The profit contribution represented 22% of Avon's total 1984 operating profit, and 17.2% of total revenues. For the first six months of 1985, operating profits gained about 13%, on a sales increase of 4%, Avon said. Since being acquired by Avon, Mallinckrodt has shown an average annual growth rate of about 10%, with operating profit climbing 36%. Avon maintained that it "expects to have a buyer by the end of the year," but it declined to speculate on a potential selling price. Proceeds from the Mallinckrodt divestiture will go to repurchase up to 20 mil. shares of Avon common stock, and to reduce long- and short-term debt, the company said. At Avon's current trading level of about $25 a share, the repurchase proposal indicates that Avon has a baseline target of netting at least $500 mil. from Mallinckrodt. If Avon set the purchase price for Mallinckrodt at $720 mil., to match its own price, the chemical company would now go for almost nine times operating earnings. Mallinckrodt's business currently is dominated by health care products, primarily diagnostics and critical care products, which represented about 65% of the company's 1984 sales. Additions to the company's health care business under Avon include the radiopharmaceutical business RadPharm, in 1982, and intra-arterial blood pressure monitor business Tronomed, acquired in 1984 for about $14 mil. In a March 20 address to analysts in New York, Waldron outlined a blueprint for more than doubling the market value of Avon's stock by the end of 1988. Specific plans included continued rapid expansion of Foster Medical, which added 30 home health care centers in 1984. At the time, Waldron identified Mallinckrodt as the third priority among the company's seven core business units, behind beauty products and Foster. He characterized the business as a "strong business in a good industry," with "excellent" margins and market shares, particularly in critical care operations, which account for about 13% of the division's health care revenues and about 29% of health care operating profits. In announcing the decision to sell Sept. 5, Waldron said, "It is a great company, but it just doesn't fit with Avon's strategic direction." Once the sale goes through, Avon will have "substantially completed" its realignment, the company said. Last year, Avon sold Tiffany & Co., the jewelry company, and repurchased 6.5 mil.

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