Analysts Mull Avon’s Future Following Coty’s Dropped Bid

Coty’s withdrawal of $10.7 billion bid for Avon sent shockwaves through investment community and has analysts speculating on whether the direct seller will entertain more offers or pursue its turnaround as stand-alone entity under CEO Sheri McCoy.

Coty's withdrawal of its $10.7 billion offer for Avon has many analysts speculating on whether the beleaguered direct seller will court other offers or pursue its turnaround strategy as a standalone entity under new CEO Sheri McCoy.

Coty rescinded its offer to purchase Avon on May 14, suggesting Avon stonewalled and failed to communicate with the bidder.

“Your total lack of engagement with us leads us to believe that you remain reluctant to explore a friendly, negotiated combination on a reasonable timetable,” Coty Chairman Bart Becht said in a May 14 letter to Avon's board of directors. “Two months is enough.”

The two firms had been negotiating Coty's offer since March, with Coty sweetening its bid as late as last week to $24.75 per share from its initial $22.25, with a May 14 deadline. Warren Buffett's Berkshire Hathaway and Joh A. Benckiser/JAB Holdings were among companies backing Coty's offer (Also see "Coty Flexes Financial Muscle With Increased Avon Bid, Sets Deadline" - HBW Insight, 14 May, 2012.).

Becht said that Coty provided a “compelling and well-financed proposal for a business facing multiple challenges,” noting the offer had received support from many of Avon's shareholders, research analysts and others in the financial community.

However, Avon's board seemed reluctant to explore the possibility, he suggested.

Becht pointed out that a day before the deadline, Avon sent an email indicating “without explanation” that it would need one more week to review the contents of the latest offer. Further, after Coty reached out to Avon's Board and advisers to “understand why additional time is needed,” it received no response.

“I find it remarkable that since we made our revised proposal, and despite repeated requests over the last 24 hours, no one from Avon's Board or management has been willing to speak with us, including Fred Hassan, Andrea Jung and Sheri McCoy,” Becht said.

All Eyes On McCoy

News of the withdrawal sent shock waves through the investment community, and Avon’s stock price tumbled almost 10% to $18.71 at the close of business on May 15. In a same-day Wedbush quick note, analyst Kurt Frederick anticipates that without the takeover premium that Avon has enjoyed the past several weeks, the firm's shares drop drown to $16 a share.

The news sparked other downgrades by analysts and speculation on whether Avon would receive other bids or go it alone under the leadership of McCoy.

McCoy, who was appointed to replace Jung in late April, is tasked with helping the firm fix significant challenges, including lost market share, operational and strategic issues, declining growth and new competitors in the market.

During the firm's first quarter earnings call in May, Avon reported an 82% slide in net income to $26.5 million, attributed to restructuring costs, labor and higher commodity prices.

McCoy addressed analysts during that call, stating that there was much work to do, and she would begin to address strategic planning in a public way during the second quarter call, which will likely take place in late July (Also see "Avon’s Dismal Q1 Makes Coty Bid More Appealing – Analysts" - HBW Insight, 7 May, 2012.).

In the meantime, the CEO plans to visit Avon's key markets – the U.S., Brazil, China, Mexico and Russia – through mid-June to assess the firm's strengths and weaknesses and meet with regional leadership.

Analysts Weigh In

With the withdrawal of Coty's offer, many analysts doubt that other bidders will come to the table, and are therefore all the more curious what McCoy's turnaround strategy will be.

In a May 15 report, UBS analyst Nik Modi says that while Avon is “fixable,” the firm “missed a good opportunity” to be acquired by Coty.

He adds that “while Sheri McCoy and Kimberly Ross seem like capable executives, we believe the issues at Avon will take time and lots of money to fix,” and suggests that as a standalone firm, a sustainable fix could be two to three years away.

In a May 15 report, Wellington Shields & Co. analyst Leigh Ferst said she does not believe there are other bidders for the firm and says the stock price could fall to $16 per share.

Ferst also downgraded the stock to “sell.” “We view this as a high-risk investment, with more downside than upside,” she said, adding there is little upside in the near term because the stock has been trading up on the news of a possible deal.

“Given a long list of management, strategic and financial challenges, we think it will take more than a year for a new strategy to start being implemented and for the stock to rebound from its recent lows,” she added.

Morningstar Analyst Erin Lash, who said in a May 10 report that Coty's latest offer undervalued the direct seller, notes in a May 15 report that other potential deals could materialize if Avon shows more interest in being acquired.

An offer could come from privately held Richmont Holdings, a firm that led the management buyout of Mary Kay in the mid-1980s, but it is more likely at this point that Avon will go it alone.

She acknowledges the challenges the firm faces. “New CEO Sheri McCoy has barely gotten her feet wet at Avon, with a tenure of just a few weeks, and faces significant problems that will require extraordinary powers and a fairly long time horizon to correct,” Lash says.

She adds, however, that the firm has the “right ingredients” to deliver excess returns – a respected brand, extensive geographic reach, and “an underlying business model that appeals to entrepreneurial women.”

Lash notes Coty could still pursue other potential targets, including beauty firms that would “build out its emerging-markets platform.”

Coty is reportedly preparing for an initial public offering of its stock this summer or fall. The dual New York- and Paris-based firm is majority owned by German conglomerate Joh A. Benckiser.