After wooing the struggling direct selling company for more than two months, fragrance maker Coty has withdrawn its $10.7 billion takeover bid for Avon Products (NYSE:AVP). On Sunday, Avon finally agreed to review Coty’s revised offer (dated 9th May) but wanted a week’s time to respond to the offer. Coty had, however, set a Monday deadline for Avon to enter discussions for its latest offer saying it was unsure why Avon’s board needed more time.
Avon’s new CEO Sherilyn McCoy is up for a very challenging task ahead to stabilize the business that continues to remain significantly compromised with sliding sales and profits. 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 Revlon (NYSE:REV).
Coty first met Avon to informally discuss a deal in February and made a verbal offer, followed by three letters in March, offering $22.25/share. In early April, Coty made a public $10 billion ($23.25/share) takeover bid for besieged Avon, which was immediately rejected by Avon for being undervaluing, opportunistic and uncertain. On 9th May, Coty raised its buyout offer to almost $10.7 billion, or $24.75 a share, sweetening the offer by 6.5%, strengthened with the backing of Warren Buffett’s Berkshire Hathaway, JAB Holdings, BDT Capital Partners and J.P. Morgan Chase.
The offer was at a 20% premium to the stock’s Friday closing price. Coty wanted to engage in private talks and conduct due diligence based on legal liabilities from SEC investigations into corruption charges, global expenses, future product details, but Avon missed Coty’s deadline, asking for another week’s time, to which Coty refused.
Avon Looking At Prolonged Recovery
Avon’s latest earnings revealed a continued decline in sales, falling number of sales representatives and a larger-than-expected drop in profits. The company’s position has weakened over the past few months with poor earnings results, disruptive ERP implementation in Brazil, and the costly SEC investigations into alleged overseas bribery. Adding to the woes, the company foresees further weakness in its biggest markets of U.S. and Brazil in the coming months. Avon is in the process of reassessing its long-term business strategy and McCoy’s priority is to stabilize the business and arrest declining sales and sales force.
Avon had been disinclined to review any proposals until the new CEO Sherilyn McCoy completed the strategic and operational internal review of Avon’s business, believing the company’s value could rise more from a turnaround led by the new CEO. The stock has lost more than 30% value over the past six months and had recovered a bit after Coty’s takeover bid. The credit ratings agency Fitch has also put Avon on a negative watch because of a materially weakened business outlook.
We have a $23 Trefis price estimate for Avon stock, which implies a premium of 22% over the current market price.