Direct-selling beauty products company Avon Products (NYSE:AVP) recently rejected an unsolicited $10 billion takeover bid from fragrance maker Coty, a company less than half of its size, calling the offer undervalued and opportunistic. With the news, Avon stock jumped up by 17% on Monday, but was still short of $23.25/share that Coty offered. The company’s position has weakened over the past few months after having posted poor earnings results and an ongoing SEC investigation into alleged overseas bribery. The business recovery has further been delayed and complicated due to absence of a CEO, making it susceptible to hostile take-over bids during rough times. However, Monday morning’s announcement that former Johnson & Johnson (NYSE:JNJ) executive Sherilyn McCoy might will take over the role of CEO could help.
Avon sells its products to the end-consumer through direct-selling and has an active global sales force of over 6 million sales representatives. This business model separates it from peers such as L’Oreal (PINK:LRLCY), Procter & Gamble (NYSE:PG), Estee Lauder (NYSE:EL) and Unilever (NYSE:UL).
Why Avon finds Coty’s bid undervaluing, opportunistic and uncertain
Avon quickly rejected Coty’s bid saying that the $23.25 cash per share offer as “significantly undervaluing”. Even though the offer was at a 20% premium to the prior Friday’s closing price of $19.36, Avon found it much cheaper compared to its historical prices. Avon stock plummeted to a 52-week low last November after recording weak sales and business disruptions in its largest Brazilian market in the second half of 2011, and because of which Avon missed its targets and withdrew its revenue guidance. The stock previously also suffered the brunt of the company’s costly and prolonged SEC investigation for a possible violation of the Foreign Corrupt Practices Act, which also created complications for its business recovery.
Coty’s offer valued Avon at 1.1 times last year’s weak revenues and 8.7 times the 2011 EBITDA. Even though it’s open to raise the offer value after looking at Avon’s books, its ability to raise such huge financial resources to acquire a company, whose revenues were 2.5 times its own in 2011, is doubtful.
Is it wise to integrate radically different business models?
While Coty considers Avon’s unique direct sales distribution platform a quick way to give it access to several new markets and geographies, there is also the critical question of integrating a huge company that runs a radically different business model to that of its own. This is a big reason why Avon lacks many prospective suitors despite its current difficult position. It would be wiser for Avon to focus on revitalizing its direct-selling model that has proved to be very successful for the company until recently.
Avon continues with the CEO search
Avon is taking on 2012 as a “year of transition” and is planning to focus on improving sales, cutting costs and generating cash. It is, however, not planning for margin recovery. Avon’s stock picked up slightly since December as the company showed some aggressiveness by making top-level management changes and with ex-chief Andrea Jung offering to step down.
Monday morning, Avon announced that it has appointed Sheri McCoy who has spent 30 years at Johnson & Johnson and served as a vice chairman on the company’s executive committee. According to the Wall Street Journal, Ms. McCoy was leading candidate for the CEO post at J&J, but lost out in February to Alex Gorsky.
Avon’s stock has already lost about 30% of its value over the past year, and finding a new CEO that can lay out a solid strategy will help turn the company around.
We have $20.52 Trefis price estimate for Avon stock, implying a discount of 14% to the current market price.