Avon Products Inc. (AVP), the target of an unsolicited $10 billion offer from Coty Inc., sees some strategic benefits in a combination and previously considered buying the fragrances seller, according to a person with knowledge of the situation.
Coty’s cash proposal of $23.25 a share is 20 percent higher than Avon’s closing price on March 30. Avon rejected the offer, saying a deal wouldn’t be in the best interests of shareholders. For now, Avon is focused on finding a chief executive officer and close to choosing a replacement for current CEO Andrea Jung, said the person, who declined to be identified because the matter is private.
Avon, based in New York, could become open to talks once a CEO is selected, the person said. Avon is looking to reverse slowing sales amid an internal probe that prompted a 40 percent drop in its shares last year. Coty, the seller of perfumes by Heidi Klum and Beyonce Knowles, is making the proposal public to get shareholders interested in a deal that would triple its $4.5 billion in annual sales.
“Coty clearly wants to do this deal,” Ali Dibadj, an analyst at Sanford C. Bernstein & Co. in New York., said today in a telephone interview. “This is something that the Avon board should seriously consider.”
Avon rose 16 percent to $22.54 at 1:30 p.m. in New York.
“We are committed to hiring a new CEO and executing against what the company believes are its strong long-term prospects,” Jennifer Dwyer Vargas, an Avon spokeswoman, said in an e-mailed statement. “The board has been clear that with a new CEO, it believes there will be greater opportunity to improve shareholder value.”
A spokesman for New York-based Coty didn’t immediately return a call seeking comment.
Buying Avon would give Coty, owned by the largest investor in European consumer-products maker Reckitt Benckiser Group Plc (RB), a new door-to-door channel for selling its cosmetics. The takeover would be the biggest in the industry since Procter & Gamble Co.’s 2005 purchase of Gillette Co. for $57.3 billion including debt, according to data compiled by Bloomberg.
Bart Becht, Reckitt Benckiser’s former chief executive officer, became Coty’s chairman in November. Becht expanded Slough, England-based Reckitt Benckiser with acquisitions including Durex condom-maker SSL International Plc in 2010 and Adams Respiratory Therapeutics Inc. in 2007.
Coty, which holds perfume licenses for brands including Calvin Klein and Marc Jacobs, is owned by Joh A. Benckiser SE. Founded in 1904 in Paris by Corsican-born Francois Coty, the company helped develop perfume into a mass product, with 36 million consumers two decades later. Coty’s previous purchases include $400 million for a majority stake in Chinese skin-care company TJoy Holdings Ltd. in December 2010.
Coty said that Avon has a “strong presence” in emerging markets, where 68 percent of its revenue comes from. Avon’s door-to-door distribution system in countries such as Brazil and China will create growth and earnings opportunities for Coty, which derives 26 percent of its revenue from emerging markets, according to a statement today.
“Avon also brings with it manufacturing facilities in China and Brazil, both key targets for Coty,” Vivienne Rudd, head of Beauty & Personal Care Insight at Mintel in London, said today in an e-mail. “Latin America is Avon’s largest region, and the only one to turn in sales growth in its fourth quarter. It is also a region where Coty’s coverage is relatively light, hampered by the lack of a cohesive prestige retail channel.”
“Step by step we are building ourselves up in developing markets,” Coty Chief Executive Officer Bernd Beetz said in an interview in February. “We have the goal of going into developing markets.”
Beetz said in a separate interview in January that selling shares to the public is also an option for Coty.
There have been almost 300 cosmetics and toiletries takeovers in the past decade, data compiled by Bloomberg show. The median price to earnings before interest, taxes, depreciation and amortization paid in 30 of those deals was 10.8, compared with the 8.9 Coty has offered to pay for Avon, Bloomberg data show.
Avon had $11.3 billion in sales last year. The company’s direct selling model is losing ground as more traditional retail develops in countries such as Brazil, where competitors such as Procter & Gamble and Estee Lauder Cos. (EL) are vying for spending from rapidly growing middle and affluent consumers. At the same time, business in developed markets has lagged.
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Avon is investigating potential violations of the Foreign Corrupt Practices Act, which outlaws bribing foreign officials. Avon also said in October that the U.S. Securities and Exchange Commission is probing the company’s foreign operations and its dealings with analysts.
At Reckitt Benckiser, Becht was among the U.K.’s top- earning executives. He had a 90 million-pound gain on share options in 2009 and received more than 18 million pounds in compensation in 2010, including more than 14 million pounds from the exercise of options and performance-based restricted shares.
Goldman Sachs Group Inc. (GS) and Centerview Partners LLP are advising Avon. BDT & Co. is arranging equity financing for Joh A. Benckiser, while JPMorgan Chase & Co. (JPM) is working on debt financing, according to the statement. BDT, JPMorgan and Blackstone Group LP are providing financial advice to Coty, while Skadden Arps Slate Meagher & Flom LLP gave legal counsel.
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