Fitch Says Coty Deal for Avon Would Lower Credit Rating

An acquisition of Avon Products Inc. by Coty Inc. would be “credit negative,” according to analysts at Fitch Ratings.

“We expect it might be challenging for Coty to maintain investment-grade ratings after an acquisition, even at the initial offer price of $23.25 per share,” Kellie Geressy-Nilsen and Grace Barnett, Fitch analysts, wrote in a report today.

“While Avon’s current $400 million dividend could be diverted to debt service, the consolidated entity’s credit measures and financial flexibility would be materially lower.”

Avon rejected Coty’s $10 billion offer on April 2, saying it undervalued the company. Coty, the New York-based maker of perfumes by Heidi Klum and Beyonce Knowles, is working to build support among Avon shareholders for the offer. Last week, Coty said it’s confident in its financing for a deal. Buying Avon, the world’s largest door-to-door cosmetics seller, would give Coty access to emerging markets such as Brazil.

Avon’s quick dismissal of the offer, along with Coty’s statement it would not undertake a hostile bid, “lessen the prospects of a takeover,” the analysts wrote. Fitch rates Avon’s long-term debt BBB, the second-lowest level of investment grade debt, and has a negative outlook on the company.

Avon fell 1.4 percent to $21.69 at the close in New York. The shares have gained 24 percent this year.

Closely held Coty is owned by Joh A. Benckiser SE.

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