Avon Gains on Report L’Oreal May Examine Takeover Bid

Avon Products Inc. CEO Andrea Jung
Andrea Jung, chief executive officer of Avon Products Inc. Photographer: Andrew Harrer/Bloomberg

Avon Products Inc. rose 4.2 percent in New York trading after a report that L’Oreal SA may make a takeover offer for the world’s largest door-to-door cosmetics seller.

L’Oreal is considering a bid of $44 a share for Avon, the U.K.’s Daily Mail reported. That’s 33 percent more than New York-based Avon’s close yesterday. A bid at that price would be worth about $19 billion, based on Avon’s shares outstanding as of June.

The cosmetics retailer is attracting interest from several companies, including L’Oreal, the Daily Mail said. Avon, whose sales topped $10 billion last year, gets more than 70 percent of its revenue from its beauty business. About 40 percent comes from Latin America, where consumers are more accustomed to buying cosmetics, skin care and fragrances from door-to-door vendors.

Avon has “momentum in terms of operational improvements and sales heavily weighted toward developing markets,” Rick Jones, who helps manage $1.5 billion at NCM Capital Management Group, said today by telephone from Durham, North Carolina. “From that standpoint, it makes some sense for some people to be looking at it to acquire it.” His firm owns Avon shares.

Avon climbed $1.38 to $34.54 at 4 p.m. in New York Stock Exchange composite trading. L’Oreal fell 10 cents to 81.56 euros in Paris.

L’Oreal, the world’s largest cosmetics maker, and rivals including Procter & Gamble Co. are chasing growth in emerging nations, where demand for beauty products has surged as people earn more money. Regions such as Asia and Latin America should represent 50 percent to 60 percent of L’Oreal’s business in 10 years, Chief Executive Officer Jean-Paul Agon said in May.

Avon’s Value

Avon could be worth about $40 a share if sold for the average multiple of recent transactions, Jefferies & Co. analyst Douglas Lane wrote in a report today. The company may fetch closer to $50 if sold at a multiple similar to that of Alberto- Culver Co., which agreed to a $3.7 billion takeover by Unilever. Lane, based in Boston, recommends buying Avon shares.

“We would not be surprised if L’Oreal scouted the acquisition trail,” UBS AG analysts Eva Quiroga and William Houston wrote in a note today, citing the company’s low net debt level and its stake in Sanofi-Aventis SA. However, L’Oreal has no experience in direct selling and has struggled with the Body Shop since acquiring the retail chain in 2006, they wrote.

Stephanie Carson-Parker, a spokeswoman for L’Oreal, declined to comment, as did Jennifer Vargas, an Avon spokeswoman.

Jung’s Strategy

Avon has said it’s examining whether to move out of businesses such as home cleaning and appliances to focus on more profitable businesses. The company, led by Chief Executive Officer Andrea Jung, agreed in July to buy jewelry company Silpada Designs Inc. to expand its product line.

Mergers and acquisitions in the personal-care industry have picked up lately. Unilever agreed to buy Alberto in September to add Nexxus and VO5 hair products, while Reckitt Benckiser Group Plc in July bought SSL International Plc, the maker of Durex condoms.

Net debt could be less than 1 billion euros ($1.38 billion) by the end of the year and zero at the end of 2011, L’Oreal Chief Financial Officer Christian Mulliez said Aug. 26. L’Oreal’s net debt totaled 1.67 billion euros as of June 30, about 300 million euros less than at the end of 2009, the maker of Garnier shampoo and Lancome lipstick said at the time.

L’Oreal has no plans to change its 9 percent stake in Sanofi in the short term, though the investment isn’t strategic or long term, Agon said in August. UBS values the holding at 5 billion euros currently.

Low Probability

An offer by Paris-based L’Oreal for Avon is “a low probability event,” according to Chas Manso, an analyst at Evolution Securities Ltd. in London. “My own personal view is that L’Oreal isn’t interested in the direct-selling model,” Manso said.

Still, buying Avon would help L’Oreal cut manufacturing and marketing costs and extract lower prices from suppliers of ingredients for cosmetics and perfumes, said Strategic Resource Group’s Burt Flickinger.

“It makes a tremendous amount of strategic sense for L’Oreal,” Flickinger, managing director of the New York-based packaged goods consulting firm, said by telephone today. “Collectively, they have even greater growth opportunities.”

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