Coty Inc. Chairman Bart Becht said two weeks ago it was time for Avon Products Inc. (AVP) shareholders to persuade the board to accept his company’s $10 billion bid. Several investors have discussed the offer with the board, and their message is clear: Get more money or forget about it.
These shareholders said they now have more confidence that Avon can revive its fortunes since announcing April 9 it was replacing Andrea Jung as chief executive officer with Johnson & Johnson alumna Sherilyn McCoy. Coty needs to raise its bid to reflect that reality, according to Josh Strauss, co-portfolio manager of the Appleseed Fund at Pekin Singer Strauss Asset Management in Chicago, which oversees 1 million Avon shares.
“I certainly hope they don’t take the Coty offer -- I think the Coty offer is not a fair deal, it’s a lowball bid,” Strauss said in telephone interview. McCoy has “a lot of motivation to turn this around. It’s not going to take much of a business turnaround to move the stock considerably.”
Shareholders are weighing in at a pivotal moment for Avon. Coty gave the company until today to respond to its offer. Tomorrow Avon reports first-quarter earnings, and on May 3 convenes its annual shareholder meeting.
Jennifer Vargas, an Avon spokeswoman, declined to comment.
Avon hired McCoy, 53, to reverse three years of profit declines at the world’s biggest door-to-door cosmetics seller. The New York-based company’s shares fell 40 percent last year, the largest annual decline since at least 1974, leading to growing disenchantment with Jung, who led the company for more than a decade and remains chairman. Tomorrow Avon will report first-quarter earnings of $118.9 million, or 27 cents a share, according to an average of analysts’ estimates, down 17 percent from a year ago.
Avon also is investigating potential violations of the Foreign Corrupt Practices Act, which outlaws bribing foreign officials. The U.S. Securities and Exchange Commission is conducting its own probe into the company’s foreign operations and its dealings with analysts. In 2011, Avon said it fired four executives at its Chinese operations. In January, Charles Cramb, the former chief financial officer and vice chairman of the company’s developed market group, departed in a “personnel action.”
Coty, the maker of perfumes by Heidi Klum and Beyonce Knowles, wants to conduct due diligence, in part because of concern about the investigations, Becht said earlier this month.
“We have clearly laid out our position to the shareholders and have no further comment at this stage,” Tom Johnson, a spokesman, said in an e-mail.
If Coty is open to paying more, it should have communicated a higher offer contingent upon a detailed look at Avon’s books, said Gregg Fatzinger, head of the consumer banking group at Nomura Securities International in New York.
“The cart was put before the horse,” he said in a telephone interview today.
Bids from other possible acquirers aren’t likely because direct-selling companies don’t offer much room to cut costs and their operations are so different, Fatzinger said.
Coty’s cash offer, which would help it triple sales and expand into emerging markets, was valued at $23.25 a share, almost 24 percent higher than Avon’s 20-day stock trading average at the time. Avon rose 0.1 percent to $21.60 at the close in New York. The shares closed at $19.36 on March 30, the day before the bid from New York-based Coty was announced.
When Avon called Liu-Er Chen, the Boston-based head of emerging market equity strategy at Delaware Investments, for his opinion on the Coty offer, he said the bid was too low, adding that the cosmetics company needed to focus on cutting costs if it wanted to increase value for shareholders.
“I’m fully aware of the mismanagement of Avon,” Chen, who oversees 14.5 million shares, said in a phone interview. “That’s how I bought it. That’s how the stock was cheap.”
While Avon’s profit has been shrinking, the cosmetics seller generated $11.3 billion of revenue in its most recent fiscal year, compared with $8.81 billion at rival Estee Lauder Cos., convincing investors that with new management, there is value to be had.
“It’s a tremendous property and a tremendous business, and I think they have a footprint most people would be envious of,” said Howard Hansen, the co-portfolio manager of the $35 million Linde Hansen Contrarian Value Fund (LHVAX), which holds Avon shares. “The issues have been more managerial.”
Hansen, who’s based in Florham Park, New Jersey, said he would be “very disappointed” if Avon accepted Coty’s offer. At a higher price, a combination of McCoy and executives from Coty may make for a more successful Avon, he said.
Strauss said he reached out to Avon lead independent director Fred Hassan, a managing director and partner at private-equity firm Warburg Pincus and chairman at Bausch & Lomb Inc., to let him know the offer price was too low.
Hassan “is a good manager, a good steward, he will do what’s right,” Strauss said.
Hassan, lead director of Avon’s board since February 2009, is giving investors such as Strauss and Chen confidence that the company will only accept a strong offer. He established a name for himself by restoring Schering-Plough Corp. to profitability and selling it to Merck & Co. in 2009.
“If Coty has money, they should offer something like a $30 bid before Avon should open the books for them,” Chen said. “The Coty people are very smart and they should understand, even if they pay $30 or above, they get a great, great deal.”
While several shareholders said Coty’s offer is too low, Avon’s April 2 outright rejection rankled some investors.
Raymond Bragar, partner and founder of Bragar Wexler Eagel & Squire PC in New York, is preparing an amended consolidated complaint on behalf of five different shareholders, set to be filed in early May. He already filed a complaint from an individual shareholder this month.
“The new CEO certainly hasn’t publicly pushed the company to negotiate with Coty,” Bragar said. “One would think the new CEO would have a strong incentive not to negotiate with Coty because upon an acquisition, the new CEO would be most likely out of a position. All this works to the detriment of the shareholders who stand to make a significant profit on the stock if the merger were to go through.”
Don Wordell, an Orlando-based fund manager who oversees about $2.4 billion in the RidgeWorth Mid Cap Value Equity Fund, said he was happy with the amount of bid because it gave him the chance to sell Avon stock in line with the offer price.
“I would buy it back in the mid- to high teens, but not until I get some more clarity around what the new CEO’s game plan is for turning around Avon,” he said.
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