Coty Prefers Closely Held Structure for Avon Turnaround

Coty Inc., the closely held perfume maker seeking to buy Avon Products Inc. for $10 billion, has determined that a private-company structure will make it easier to turn around the door-to-door seller of cosmetics, said people with knowledge of the matter.

Coty initially pushed for an all-stock sale to Avon that would have left it as the biggest shareholder of a combined public company, said the people, who declined to be identified as the talks were private. Coty, which makes OPI nail polish and Calvin Klein fragrances, has since ruled out selling itself and concluded any combination should be closely held so it can focus on resolving bribery charges and reviving sales growth at Avon without the scrutiny of public shareholders, the people said.

To persuade Avon’s investors to support a deal, Coty is seeking to secure committed financing from Byron Trott’s Chicago-based advisory firm, BDT Capital Partners, JPMorgan Chase & Co. and majority owner Joh. A Benckiser as soon as next week, the people said. New York-based Avon rejected Coty’s offer, saying in a statement this week that a deal undervalued the company and wouldn’t be in the best interests of shareholders.

“This may be the best option Avon shareholders will get for a long time,” Ali Dibadj, an analyst at Sanford C. Bernstein & Co. in New York, said today in an e-mail. “Avon is likely fixable, but it will take time.”

Avon’s board has a fiduciary duty to consider Coty’s proposal, Dibadj said. He rates the shares “market perform.”

Coty’s Value

The board didn’t discuss details of a possible deal after receiving Coty’s earlier proposal for an all-stock merger, one person said. While Avon got access to some non-public financial and operational information about Coty, it determined it didn’t know enough about the company to make an offer or consider specific terms, said the people.

A spokesman for New York-based Coty declined to comment, as did an Avon spokeswoman.

Coty, which has about $800 million in earnings before interest, taxes, depreciation and amortization, would be valued at about $8.6 billion in an acquisition, based on the median price to Ebitda ratio of 10.8 for a basket of Coty’s peers, according to data compiled by Bloomberg. That compares with Avon’s $10 billion market value.

It may take three years to turn around Avon’s operations, one person said. In December, the company said it would seek a replacement for Chief Executive Officer Andrea Jung, who will remain chairman. Avon is close to naming a new CEO and has narrowed down its list of candidates to a small number, said one person. One focus has been on finding an executive with overseas experience, the person said.

Avon Probes

More than 80 percent of Avon’s sales last year came from outside North America, and the company is dealing with internal and federal investigations into whether executives bribed foreign officials in violation of the Foreign Corrupt Practices Act. In 2008, the company began investigating its Chinese operations’ compliance with the law, leading to the firing of several executives. Avon expanded the probe to other developing countries, and the Securities and Exchange Commission opened its own investigation.

Coty’s next steps will be to meet with Avon shareholders, possibly as soon as next week, to try to persuade them they should pressure Avon’s board to consider their overture to buy the larger beauty company, according to two people.

Coty’s Backers

BDT’s equity investors won’t support a hostile offer, and Coty’s management is also opposed to an antagonistic process because there are too many unknowns to commit to a deal at a certain price, one person said.

Avon rose 3 percent to $23.42 at 4:01 p.m. in New York. The shares soared 17 percent on April 2 following Coty’s offer, and are up 34 percent this year.

Coty and Avon agreed that a combination makes some strategic sense, with Avon bringing skin care and make-up to Coty’s perfume-focused offerings, along with an entry into Brazil and other developing markets, the people said. Coty sells to a range of retailers including upscale department stores and mass merchants. Avon would get access to Coty’s marketing and research and development resources, along with some higher-end Coty products its representatives could sell.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE