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Avon Products (NYSE: AVP) Shoots the Messenger

By Chad Fraser on April 3, 2012

Avon Products (NYSE: AVP) was on the defensive again yesterday, after privately held Coty Inc. went public with its proposal to buy the company for $10 billion, or $23.25 per Avon share, in cash.

The move came after Coty made earlier offers in private but was rebuffed by Avon’s board of directors. That prompted Bart Becht, chairman of Coty’s board, to release a letter he sent to Avon Products’ CEO Andrea Jung yesterday morning.

Coty Aims to Piggyback on Avon Products’ Strong Overseas Growth

In his letter, Becht outlined the many strengths he sees in a combined company. For one, he points out that their products complement each other (Coty is heavily weighted toward celebrity-themed fragrances and nail products, while Avon Products focuses on makeup and skin care).

In addition, he pointed out that Coty mainly sells through retailers, while Avon Products uses a door-to-door approach. That has helped Avon quickly expand in emerging markets (which now supply 68% of its revenue), and a merger would let its sales associates sell more Coty products in these countries. In light of all that, Becht wrote:

“We do not understand how your board’s unwillingness to discuss our proposal can serve the best interests of Avon’s shareholders. In rejecting our request for discussions, you have referred, among other things, to questions your board has about value. We believe, based on an extensive review of public information about Avon, that our proposed purchase price is a full and fair one.”

Investors were quick to agree: Avon shares shot up 17.25% on the day, to $22.70, or just below Coty’s offer price. That indicates that investors don’t expect a better deal to come along.

Avon Products Was Quick to Slam the Door on a Potential Takeover

Avon was quick to shoot back with a short press release arguing that it thought the offer, at 1.1 times the company’s 2011 revenue and 8.7 times 2011 EBITDA, was too low.  Avon also questioned whether Coty was even serious about the takeover:

“Coty’s letter to Avon dated March 30 alludes to the possibility that, following diligence, Coty reserves the right to raise or lower its price to acquire Avon. In the final analysis, Coty is attempting to obtain a ‘free look’ at Avon in the absence of any commitment whatsoever to close a transaction at any price.”

Unwanted Proposal Caps a Terrible Year for Avon Products

Avon’s high-profile struggles have dragged on for more than a year and have included a poor fourth-quarter 2010 earnings report that led to a management shakeup in February 2011, more disappointing earnings in the 2011 third quarter and a $400,000 loss in its latest quarter.

The company also suffered from a disastrous computer upgrade that led to product shortages in Brazil and other countries, and is the focus of two SEC investigations—one of which involves allegations of bribing foreign officials.

(Investing Daily editor Jim Fink details the whole sad story in his December 23, 2011, article “Calling Avon: CEO Andrea Jung Should Leave Now!”)

In response, Avon’s board has decided to remove Jung from the top job. However, in an odd twist, she will remain at her post until the board finds a successor. She will also stay with Avon for two years as chairman of the board of directors. As Fink points out, this arrangement will make it even harder to bring in someone with fresh ideas:

“No CEO worth his or her salt would want to join a company that included a former CEO being paid millions of dollars to look over her shoulder and nix innovative restructuring ideas. Make no mistake about it—Avon needs a radical overhaul and Jung’s continued presence will just make the overhaul more difficult to implement.”

Are Avon and Coty a Good Match?

While most analysts were focusing on whether or not Coty’s proposal had any hope of succeeding—and whether the price was indeed too low—’s Lauren DeSanto went further to look at some of the difficulties a merged company would face. In her article “Avon-Coty Combo Could Be Messy,” she disagreed with Becht that the two companies’ businesses are compatible:

“Any such deal would probably be quite messy, in our view, as Coty has strong department store relationships in the United States. We doubt these retailers would enjoy seeing the same brands that sit at department store counters distributed by direct sales representatives. Additionally, outside the U.S., in markets such as Brazil and Russia, we are not sure how much traction many of Coty’s celebrity brands would have.”

Even so, as MSN Money points out, Avon would probably do better if it were run by Coty, but the ongoing CEO search (now into its fourth month) and Jung’s continued involvement are big roadblocks to a deal. What’s more, even if it succeeds, as DeSanto points out, such a big purchase is likely to come with more than a few unexpected (and unpleasant) surprises.

As Fink points out, the company’s debt is manageable and Avon remains “fixable.” But merger or no, it still needs massive restructuring—including a total management overhaul.

In the end, there are simply too many other consumer stocks that are well positioned to profit from both overseas growth and a U.S. recovery—Wal-Mart (NYSE: WMT) and McDonald’s (NYSE: MCD) leap to mind—to make Avon worth the gamble. 

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