Ding-Dong, Coty Calling
Sensing an opportunity to expand its offerings as well as its presence in developing markets, Coty has made an unsolicited $10 billion offer to acquire Avon. The larger company quickly rejected the offer as “opportunistic and not in the best interest of Avon’s shareholders,” claiming that it "substantially undervalues” the company.
Coty markets perfumes bearing celebrity names such as Calvin Klein, Beyoncé, Heidi Klum, Lady Gaga and Madonna. The takeover bid puts Avon in play, some analysts say, particularly with its leadership in transition after Andrea Jung announced in December that she would relinquish the CEO title.
“With no clear CEO candidate at this point -- being fairly rudderless -- Avon has fewer options than other companies in a similar situation,” Barclays Capital analyst Lauren Lieberman tells the Financial Times.
“Let the battle begin,’ reads the lede of a Women’s Wear Daily story bearing the headline, “$10B Bid for Avon Shakes Up Industry.”
The FT’s Barney Jopson, Helen Thomas and Anjli Raval write that Coty chairman Bart Becht, former CEO of Reckitt Benckiser, “is performing a so-called bear-hug maneuver that is designed to encourage shareholders to put pressure on a target company’s board to negotiate, but stops short of taking a hostile offer direct to investors.”
Coty is owned by Joh. A. Benckiser GmbH, the investment arm of Germany's Reimann family and a major shareholder in consumer products company Reckitt Benckiser Group, the marketer of Clearasil and Woolite, the Wall Street Journal reports. "It's a huge growth opportunity," Becht tells the Journal’s Emily Glazer, Gina Chon and Anupreeta Das. "Coty brands would immediately have access to emerging markets."
The companies have been engaged in informal talks about various combinations since Joh. A. Benckiser CEO Peter Harf, a former Coty chairman, approached Avon to see if it would be interested in buying the smaller company, a source tells the Journal, but the talks did not advance to a serious stage.
Coty moved into the celebrity brand area a decade ago when it signed Jennifer Lopez to be the pretty face in front of an eponymous perfume brand. In 2005, it acquired Unilever's fragrance lines, including Calvin Klein and Vera Wang. Other recent acquisitions include DLI Holding Corp., maker of Sally Hansen nail products and N.Y.C New York Color makeup; Dr. Scheller Cosmetics AG of Germany; Philosophy skin-care products and nail-polish maker OPI Products, according to the Wall Street Journal.
About 68% of Avon’s revenue comes from emerging markets, according to Coty, which currently derives 26% of its revenue from emerging markets.
“Avon also brings with it manufacturing facilities in China and Brazil, both key targets for Coty,” Mintel analyst Vivienne Rudd tells Bloomberg. “Latin America is Avon’s largest region, and the only one to turn in sales growth in its fourth quarter. It is also a region where Coty’s coverage is relatively light, hampered by the lack of a cohesive prestige retail channel.”
“Despite Avon’s quick rejection of Monday’s proposal, a merger would make sense,” writes Michael J. de la Merced in the New York Times. “It would combine Avon’s army of sales representatives, including the fabled Avon ladies, and array of color and body products with Coty’s wide range of celebrity and licensed fragrances and nail polishes.”
Bloomberg reports that an insider tells it Avon could be more amenable to a deal once it finds the CEO it has been looking for.
“We are committed to hiring a new CEO and executing against what the company believes are its strong long-term prospects,” an Avon spokeswoman emails Jeffrey McCracken, Lauren Coleman Lochner and Matt Townsend. “The board has been clear that with a new CEO, it believes there will be greater opportunity to improve shareholder value.”
But Morningstar analyst R.J. Hottovy points out to the Associated Press that the companies have differing business models. "It would be very difficult for a direct-sales model to be integrated into a traditional consumer product company," he says.
Attorneys are licking their chops over the offer. The law firm of Brower Piven says that it has “commenced an investigation into possible breaches of fiduciary duty to current shareholders of Avon … relating to its rejection of an offer by Coty…,” and is inviting shareholders to contact it for further information.
And the Wall Street Journal’s Samuel Rubenfeld reports that “Avon has spent hundreds of millions of dollars over the past several years investigating possible violations of the Foreign Corrupt Practices Act, which bars bribing foreign officials for business, and the probe is continuing.” Coty would acquire that potential liability along with Avon’s products, manufacturing and distribution network.
In a separate development yesterday, Avon announced that Douglas R. Conant, the retired president and CEO of Campbell Soup, has joined its board.