Avon (NYSE:AVP) stock fell 11% on Tuesday after Coty walked away with its $10.7 billion takeover bid late on Monday and investors followed suit. Avon had reluctantly agreed to review the offer on Sunday but asked another week’s time, while Coty had set a Monday deadline. The stock has lost more than 30% value over the past six months, and recovered after Coty’s takeover bid. At current prices, Avon is worth less than before Coty made its original offer. The company is conducting a strategic business review with its new CEO, and is struggling to turn itself around and arrest quickly declining sales and profits. Avon had rejected Coty’s previous bid calling it undervaluing, and said that more value could be extracted by a turnaround than by being bought out.
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).
Last week, Coty raised its previous $10 billion buyout offer by 6.5% to almost $10.7 billion, or $24.75 a share, backed by financing from 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. After the latest slide, the stock priced $18.70 is worth 30% less than Coty’s offer and even 3% lower than its price before Coty’s original offer two months back. Coty wanted Avon to enter in private talks to conduct due diligence by Monday, a deadline Avon missed.
Recovery Could Run Into Years
Avon was 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. McCoy is likely to complete visiting Avon’s top markets, United States, Brazil, China, Mexico and Russia by mid-June to prioritize stabilization efforts and recovery. However, Avon definitely seems to be looking at a prolonged recovery that could run into years as its biggest Brazil and U.S. markets may weaken further before they see a recovery.
The company’s active sales representatives registered strong growth last decade, consistently growing from 5 million in 2005 to 6.5 million in 2010. The number suddenly declined to 6.4 million last year, with a decline in its largest market in Latin America (particularly Brazil) due to sub-par service levels and ERP system related business disruptions as well as continued business weakness in North America.
The performance especially worsened in the second half of 2011. The down slide in sales and profits continued until the most recent quarter with a faster decline in the number of active sales representatives and the number of orders. This happened despite increased investments in Representative Value Proposition (RVP) in the U.S. and Brazil, which was worsened by high commodity and labor costs. The company is also going through a long and costly bribery investigation that has held back recovery.
We have a $22 Trefis price estimate for Avon stock, which implies a premium of 15% over the current market price.