Struggling cosmetics seller Avon Products Inc. on Monday rejected a $10 billion buyout offer from Coty Inc., a smaller beauty products maker looking to capitalize on Avon’s business woes. The $23.25-per-share bid marked a 20 percent premium to Avon’s closing stock price Friday. Avon said that was too low. But investors frustrated with the company’s shrinking profits and disappointing sales growth sent the stock soaring 17 percent on the news.
It’s been a steep slide for an American icon. Founded in 1886, Avon became a fixture in households across the country as its legions of “Avon ladies” went door to door selling makeup. But North American sales have long been in decline. Now, about 80 percent of Avon’s $11 billion in annual revenue comes from overseas.
The company’s profit has shrunk over the past three years. It has frequently missed analysts’ earnings expectations and posted weak sales in some of its largest markets, including Brazil and Russia. Avon also faces a bribery probe that started in China and widened to other countries. The Securities and Exchange Commission is investigating Avon’s contact with financial analysts in 2010 and 2011 related to the investigation.
Investors and analysts have blamed CEO Andrea Jung for being slow to react to declining results and wrap up the bribery investigation. In December, Avon began seeking a replacement for the 12-year veteran, who will remain chairman.
New York-based Coty is mainly known in the U.S. for its Calvin Klein fragrance lines and perfumes sold under the names of celebrities including Beyonce, Lady Gaga and Celine Dion. Coty went public with its bid after private overtures failed to result in negotiations, but said it won’t pursue a hostile takeover.
Founded in Paris in 1904 by perfume pioneer Francois Coty, the company sells products in 135 markets across the globe and had revenue of $4.1 billion last year. It has said it wants to increase that to $7 billion by 2015. Adding Avon’s $11 billion a year in revenue would far surpass that goal. The deal also would strengthen Coty’s hand in emerging markets.
In the past two years Coty has snapped up smaller beauty brands such as OPI nail polish and skin care products maker Philosophy Inc. This would be the New York company’s biggest deal. The acquisition also would be the largest in the U.S. so far this year, according to research firm Dealogic, and the biggest in the global retail sector since 2007.
Avon’s stock rose $3.34, or more than 17 percent, to close at $22.70 on Monday. Still, the stock is down roughly 39 percent from its 52-week high of $31.60 last May and is worth less than half of its all-time high of $46.11 in 2004.
Avon’s business problems and stock decline made it a tempting target, Morningstar analyst R.J. Hottovy said. Still, he thinks Coty’s offer was a bit low. He values Avon’s stock at about $25.
The companies’ differing business models would make a combination tricky, he said.
“It would be very difficult for a direct-sales model to be integrated into a traditional consumer product company,” he said.
Coty said in a letter to Avon that its proposal would not interfere with Avon’s CEO search. Coty, which said it would call the combined company Avon-Coty, expressed willingness to consider boosting the bid if Avon can show it is worth more. But Avon said that Coty’s non-binding bid is not a real offer.
“Coty is attempting to obtain a ‘free look’ at Avon on the absence of any commitment whatsoever to close a transaction at any price,” Avon said.
Standard & Poor’s Ratings Services placed its ratings on Avon Products Inc. on watch for possible downgrade. It said Coty will likely continue to pursue the company and Avon may take a more aggressive approach to defend itself, such as taking on more debt to buy back shares to placate shareholders.
Avon also announced late Monday that it has elected Douglas Conant to its board of directors, effective immediately. Conant, 60, retired last year as president and CEO of Campbell Soup Co. and is CEO of DRC LLC, a leadership consulting firm he founded in August. The company said Conant’s experience in growing brands and transforming businesses will be an asset to Avon.
Paul S. Pressler, a partner at private equity firm Clayton, Dubilier & Rice Inc. said he won’t stand for reelection to the board. Avon spokeswoman Jennifer Vargas said the board change was already scheduled for announcement Monday and is not tied to the Coty deal.
Coty is controlled by German holding company Joh. A. Benckiser GmbH, which also operates consumer products company Reckitt Benckiser Group PLC. Reckitt’s brands include Air Wick air freshener and Clearasil skin care products.