Coty Low-Ball Offer Seen Emerging as Avon’s Best Option

Avon Products Inc. (AVP) Chairman and Chief Executive Officer Andrea Jung will have a hard time fending off a takeover by Coty Inc.

Coty Chairman Bart Becht’s $10 billion bid for Avon yesterday is the lowest on record relative to earnings and sales for cosmetics company takeovers, according to data compiled by Bloomberg. Yet it comes as the world’s largest door-to-door seller tries to turn itself around, weathers investigations into possibly corrupt practices and seeks to replace Jung as CEO.

As a result, Avon may not attract other bids. The company’s direct-selling model is an awkward fit for potential strategic bidders such as Procter & Gamble Co. (PG), while its legal troubles may scare off private-equity bidders, said Rommel Dionisio, an analyst at Wedbush Securities in New York.

“This is something that the Avon board should seriously consider,” Ali Dibadj, an analyst at Sanford C. Bernstein & Co. in New York, said yesterday in a telephone interview.

After initially presiding over double-digit profit growth after taking the reins in 1999, Jung has since stumbled. By the mid-2000s, sales in the U.S. had slowed as younger customers defected to such brands as Sephora and Clinique. Overseas, Avon found itself battling larger competitors such as P&G. Last year came the bribery investigation, and in December Jung agreed to stand aside as CEO, while retaining the chairman title.

Though Avon rejected Coty’s offer, it previously considered buying the company, according to a person with knowledge of the situation. Avon sees strategic benefits to a tie-up and may be open to talks once a CEO is selected, said the person, who declined to be identified because the process is private.

New CEO

Avon spokeswoman Jennifer Dwyer Vargas yesterday declined to discuss talks between the companies. She said Avon is focused on finding a new CEO and turning around the company.

Coty’s unsolicited bid was almost 24 percent higher than Avon’s 20-day stock trading average, compared with a 30 percent average premium for takeovers of cosmetics and personal care companies worth at least $1 billion, according to data compiled by Bloomberg.

Avon shares last closed higher than Coty’s proposal on Oct. 24 at $23.85, before the U.S. Securities and Exchange Commission disclosed it had started a probe into possible overseas bribery. The stock then fell 19 percent to $19.36 as of March 30, the last day of trading prior to Coty’s disclosure.

The offer values Avon at almost $12.1 billion, including net debt, or about 8.9 times the company’s 2011 earnings before interest, taxes, depreciation and amortization of $1.36 billion, data compiled by Bloomberg show.

That’s the cheapest for a takeover in the industry greater than $1 billion, the data show. The median for the group is 14.8 times Ebitda. The bid of $23.25 values Avon’s equity at an 11 percent discount to its sales last year, also the industry’s least expensive revenue multiple, the data show.

Opportunistic Bid

While Avon said Coty’s offer was opportunistic and undervalued the company, the price may be realistic given Avon’s slow sales growth and the uncertainty surrounding its CEO search and investigations.

Yesterday the shares closed at $22.70, below Coty’s offer, a sign that arbitragers who profit from mergers and acquisitions are skeptical that a bidding war will break out.

“Just because one company makes a move, it doesn’t necessarily put the target in play,” said Connie Maneaty, an analyst at BMO Capital Markets in New York.

She pointed to Carl Icahn’s offer for Clorox Co. (CLX) last year, which elicited no other bids and ended with Icahn withdrawing his slate of board candidates.

Coty said it wouldn’t pursue a hostile takeover.

Legal Woes

Avon may be even less likely to attract other bids because of its legal woes. In 2008, the company began investigating its Chinese operations’ compliance with the Foreign Corrupt Practices Act, which outlaws bribing foreign officials. That led to the firing of executives, Avon expanded the probe to other developing countries, and the SEC opened its own investigation.

Coty went public with an offer in part because it wanted to press Avon’s board to give Coty access to confidential documents that, besides spotlighting potential cost synergies, might also shed light on the internal investigation, Becht, 55, said in an interview yesterday.

“The probe does concern us,” Becht said. “It is one of the reasons we want to do diligence.”

Buying Avon would bolster Coty’s push into developing markets and in skin-care and make-up. Coty has acquired three companies in the past two years, including a majority stake in Chinese skin-care company TJoy Holdings Ltd. in December 2010. For Avon, a tie-up with Coty would allow it to add pricier products to its lineup, which could boost earnings, according to a note yesterday from Mark S. Astrachan, an analyst at Stifel Nicolaus & Co. in New York.

Iconic Company

A tie-up between Avon and Coty makes sense because “it creates a strong, iconic beauty company all over the world,” Becht said. “We are very good at innovation and marketing and execution. We believe we can drive growth. We believe a few of our beauty brands could be introduced in the Avon distribution network and infrastructure and get us into emerging markets.”

Savings achieved from synergies would be reinvested in Avon, he said, declining to provide specifics in the absence of due diligence.

While Becht said he was prepared to become Avon’s CEO, Avon plans to continue looking for a new chief executive, Vargas said.

“The board has been clear that with a new CEO, it believes there will be greater opportunity to improve shareholder value,” she said.

Hiring a new CEO “would not be helpful” in light of Coty’s offer, Becht said.

In a note yesterday, Lauren Lieberman, an analyst at Barclays Capital Inc. in New York, said the offer, though lower than other recent beauty deals, “may be relatively reasonable as it stands” given Avon’s sluggish growth in the past five years and need upgrade systems among other investments.

“With no clear CEO candidate at this point, being fairly ‘ruddlerless,’ Avon has fewer options than other companies in a similar situation,” Lieberman wrote.

To contact the reporters on this story: Lauren Coleman-Lochner in New York at llochner@bloomberg.net; Jeffrey McCracken in 東京 at jmccracken3@bloomberg.net

To contact the editor responsible for this story: Robin Ajello at rajello@bloomberg.net

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