Avon’s Reviewing Coty’s Revised Buyout Offer

Avon Products‘ (NYSE:AVP) board has agreed to consider perfume maker Coty’s raised $10.7 billion bid to take over the struggling direct selling company and will respond to Coty’s letter within a week. Coty had, however, set a Monday deadline for Avon to enter discussions for its latest offer and has responded by saying it was unsure why Avon’s board needs more time. Avon continued to rebuff the unsolicited $10 billion takeover bid from Coty despite repeated advances till recently but it is now under growing pressure to consider Coty’s proposal. The stock jumped on Wednesday amid the news of Coty’s revised bid but cooled thereafter, suggesting investors might not be convinced the bid will succeed.

Avon sells its products to the end-consumer through direct-selling with $11 billion in annual revenue and has an active global sales force of over 6 million sales representatives in more than 100 countries. 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).

Coty’s Revised Bid Mounting Pressure On Avon

Coty has now raised its buyout offer to almost $10.7 billion, or $24.75 a share, sweetening the previous $10 billion offer by 6.5%, strengthened with the backing of Warren Buffett’s Berkshire Hathaway that could provide $2.5 billion in financing. Coty’s major shareholder JAB Holdings, has also recently announced the sale of its $2 billion worth of stake in another company, Reckitt Benckiser to fund new investments, likely to be Avon. It also expects debt financing support from JPMorgan Chase to support its bid.

These developments have amplified the pressure on Avon despite its earlier preference to avoid reviewing any proposals until the new CEO Sherilyn McCoy completed the strategic and operational internal review of Avon’s business.

Coty also wants to engage in private talks and and could raise this bid if Avon allowed access to its financials. Coty wants to conduct due diligence based on legal liabilities from SEC investigations into corruption charges, global expenses, future product details.

Chances Of A Prolonged Recovery

While Coty’s offer is much cheaper than Avon stock’s historical prices, it looks appealing in light of recent business trends following its latest earnings. The stock has already declined more than 30% over the past six months with declining sales, business disruptions, costly SEC investigations into alleged overseas bribery and the delay in appointing its new CEO. The credit ratings agency Fitch has also put Avon on negative watch because of a materially weakened business outlook.

Avon rejected Coty’s $10 billion ($23.25/share) take over bid last month calling the offer undervalued, opportunistic and uncertain. But Coty has been persistent in its offer, citing clear mismanagement behind the company’s distressed condition.

While Coty considers Avon’s unique direct sales distribution platform a quick way to give it access to several new markets and geographies, particularly emerging markets, the more crucial question is if it would be wise to integrate a huge company of Avon’s size running a radically different direct-selling business model than Coty’s, a company half its size. Avon has also drawn take over interest from Richmont Holdings, once one of Avon’s biggest shareholders.

We have a $23 Trefis price estimate for Avon stock.