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Why Avon is no longer a takeover target (for now)

FORTUNE — Back in April, Avon was a hot target.

Fragrance maker Coty, majority-owned by German holding company Joh. A. Benckiser GmbH, made an unsolicited $10 billion offer for the direct seller of beauty products. Fortune also reported that Richmont Holdings was putting together a bid for the company. (See Avon: The rise and fall of a beauty icon)

At the time, Fortune detailed what had made Avon so vulnerable in the first place: plagued by mismanagement and poor execution during the tenure of longtime CEO Andrea Jung, the company had lost sight of its core customer. The stock hit $46 in 2004, a high for Jung’s reign, but had dropped to around $19 just prior to the Coty bid.

Seven or so months later, the stock’s slide has continued, with the share price hovering around $14. Profits in the third quarter, reported Nov. 1, declined 81% over the same period in 2011.

Despite the deteriorating numbers, talk of any new buyers — at least for the time being — has cooled. Avon might look even more exposed to an unwanted bid on the surface, but a private equity deal seems unlikely at this point.

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A lot has changed at Avon, but the biggest change is that Jung is no longer in charge. A year ago, when the company announced its latest financial and operational review, Jung was still CEO. Avon had already undergone two unsuccessful restructurings during her time as at the top, and analysts posited whether a turnaround would be easier to execute beyond the public eye.

But analysts say that the spotlight hasn’t stopped current chief executive Sheri McCoy, who took over in April, from making hard decisions.

“The impression they convey is all options are on the table,” says Morningstar analyst Erin Lash, “even if that means exiting some markets, going through another round of head count reductions, or whether that means slashing dividend.”

On the company’s most recent earnings call, McCoy acknowledged that the company had a long road ahead, telling analysts, “I recognize you would like to hear me present a magic bullet or a quick fix, but our business is complex,” and that “the challenges Avon is facing developed over time, not overnight, and the solutions will take time as well.”

Avon’s costly and ongoing Foreign Corrupt Practices Act investigation could put off any potential buyer. Prosecutors have been investigating whether or not Avon executives accepted bribes in several overseas markets. The company has already spent hundreds of millions on legal and professional fees associated with the inquiry and compliance reviews—and that’s even before any settlement costs. Atlantic Equities analyst Victoria Collin says that Avon’s FCPA probe “probably makes it a little bit untouchable.”

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History also suggests that Avon (AVP) isn’t interested in putting itself up for sale: The company’s board turned down Coty’s initial $10 billion bid at $23.25 per share and installed McCoy, a Johnson & Johnson veteran, soon after. (Avon did say it would consider a sweetened offer that included backing from Berkshire Hathaway, but Coty went on to withdraw the proposal.)

It’s unlikely the board’s thinking has altered so significantly in half a year that it would jump behind a deal — especially with a new CEO, who hasn’t had the chance to fully implement a turnaround plan. And these kinds of deals don’t tend to happen without the consent of the board.

“You haven’t really seen private equity go hostile in these types of situations,” says Scott Potter, managing partner of San Francisco Equity Partners, a consumer-focused private equity firm.

The biggest hurdle for a private equity deal is Avon’s cash flow issues and high level of debt.

Cash from operations fell $27 million to $220 million during the third quarter, and while CFO Kimberly Ross said the company will aggressively cut costs, Avon has also committed to reinvesting in the business. While necessary, these moves won’t loosen the pressure on cash flow.

Morningstar’s Lash looks at Avon’s debt to EBIDTA ratio as a measure of leverage, which over the last five years averaged 2.0 times. Morningstar forecasts it will increase to 3.2 times on average over the next five years. She noted that Avon’s levels greatly exceed beauty companies L’Oreal (0.8 times and 0.2 times, respectively) and Estee Lauder (1.1 times and 0.5 times, respectively).

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“Avon’s debt was amassed partly because the firm was expending more on capital expenditures and on dividends than it was generating in operating cash flow,” she wrote in an email. “We think the high level of debt that AVP is already operating with would be an impediment to a private equity firm being interested in a deal.”

A private equity firm would have a hard time adding more leverage.

“I tend to put my growth lens on everything,” says Potter of San Francisco Equity Partners, “which is what can I do to get that thing growing again, and typically debt is the enemy of a growth thesis.”