Coty Raises Avon Offer, Wants Private Talks To Secure Deal

by Trefis Team
Avon Products
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Avon Products‘ (NYSE:AVP) stock jumped 9% on Wednesday amid news that Coty could be readying a bid for taking over the besieged direct selling beauty company. Coty’s major shareholder JAB Holdings, has recently announced the sale of its $2 billion worth of stake in another company to fund new investments, likely to be Avon. On Thursday, Coty also raised its offer by 6.5% to $10.7 billion with a deadline, with help from billionaire investor Warren Buffett’s Berkshire Hathaway that could provide $2.5 billion in financing.

Avon continued to reject the unsolicited $10 billion takeover bid from Coty despite repeated advances last month. 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).

Coty Garners Finances To Facilitate Avon Bid, Raises Offer

Avon’s stock rose sharply on Wednesday as one of Coty’s major shareholders, JAB Holdings BV, announced it was selling a 4.9% stake in Reckitt Benckiser, worth $2.1 billion to fund new investments, speculated to be Avon. Avon rejected a $10 take over bid from its smaller rival Coty last month calling the offer undervalued, opportunistic and uncertain. Coty has now raised its buyout offer by about 6.5% to almost $10.7 billion, with help from billionaire investor Warren Buffett’s Berkshire Hathaway that could provide $2.5 billion in financing. It also expects debt financing support from JPMorgan Chase to support its bid.

It is now offering $24.75 per share up from the previous bid of $23.25 per share, subject to due diligence. Avon has indicated to consider Coty’s offer “in due course”, but Coty said that it would withdraw the offer if Avon doesn’t enter discussions until Monday, May 14th. Coty also wants to engage in private talks and could raise this bid if Avon allowed access to its financials. These developments could create significant pressure on Avon to consider the proposal despite its preference to avoid reviewing any proposals until the new CEO Sherilyn McCoy completes reviewing Avon’s business.

In Troubled Waters

Avon’s stock tumbled last week after reporting a steep decline in its Q1 profits. The stock has lost almost 30% value in the last six months with declining sales, business disruptions, costly SEC investigations into alleged overseas bribery and the delay in appointing a new CEO to replace Andrea Jung.

The business continues to remain significantly compromised and could see further weakening in its key Brazilian and U.S. markets, making the task of stabilizing the company even more challenging for its new CEO Sherilyn McCoy.

Avon is currently reassessing its long-term business strategy to plan its recovery but has become susceptible to hostile take-over bids during rough times. Meanwhile, credit ratings agency Fitch has also put Avon on negative watch. It has also drawn take over interest from Richmont Holdings, once one of Avon’s big shareholders. ((Avon shares close up on report of takeover bid, Business Week, May 2012))

We are in the process of revising our $23 Trefis price estimate for Avon stock.

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