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Coty Ups Bid, Lures Avon to Rethink

AVP

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Avon Products Inc. (AVP - Analyst Report) seem to be in a state of dilemma after Coty Inc. inflated its takeover bid to roughly $10.7 billion for the world's largest direct seller of beauty and related products. Coty, this time, has also set a deadline of May 14, 2012, for Avon to engage into talks regarding the takeover. If Avon fails to stick to the deadline, Coty plans to withdraw its proposal.

Avon on May 13th informed Coty that the Board will consider the new bid and respond within a week. However, the market continued to react negatively due to Avon’s stance so far on Coty’s proposal. As a result, Avon’s share price has dipped nearly 6.5% following Coty’s revised proposal.

Last week, privately-held beauty company Coty approached cosmetics maker Avon, with a revised buyout bid offering to pay $24.75 per share, an increase of $1.50 a share from $23.25 per share proposed earlier last month. The new bid represents a 36% premium on Avon’s closing price on March 6, 2012 and an 18.5% premium on Avon’s closing price on May 10, 2012. The new bid is subject to due diligence and other conditions.

Earlier, Avon had turned down Coty’s $10 billion public bid to buy Avon, citing that the bid price of $23.25 per share undervalued the company. Avon’s rejection had come after Coty went public in order to indulge Avon in a discussion regarding the buyout. Previously, Coty’s three proposals to Avon’s CEO failed to bring Avon to a discussion or to arouse any interest in the buyout deal.

Coty’s equity financing sources for the transaction include Coty's main shareholder, Joh. A. Benckiser, BDT Capital Partners and some of its limited partners, and Berkshire Hathaway Inc. The company has tied up with J.P. Morgan Securities for debt financing. Sources indicated that about $2.5 billion of the financing will come from Berkshire Hathaway.

According to Coty, the combination would create an iconic beauty company that would further provide new growth opportunities for both the companies. Through the deal, the company expects consumers to reap benefits of superior access to innovative, quality and branded beauty products across multiple distribution channels.

Additionally, the combination will benefit the product categories as each company’s forte in product offerings will complement the other. Coty is a leader in Fragrances and Nail Products, while Avon’s core strength lies in Color and Skin, and Body products. The offer proposed to name the new company as Avon-Coty.

Founded in 1904 by a perfume maker, Coty is a leader in global beauty with annual net sales of $4.5 billion. The company has grown into a supplier of fragrances and nail polishes, having a portfolio of notable brands. The company sells its products to consumers in about 135 markets worldwide.

Avon Products is a leading global beauty company targeting women consumers in over 100 countries through 6.5 million independent sales representatives. The company faces stiff competition from other direct-selling companies as well as companies selling through prestige retail channels. One of the prime competitors of Avon is Revlon Inc. .

Avon currently retains a Zacks #5 Rank, which translates into a short-term ‘Strong Sell’ rating. Our long-term recommendation on the stock is ‘Neutral’.

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