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Shares in L’Oréal fell 0.12 percent Tuesday to 81.56 euros on the Paris stock market following rumors that the French cosmetics giant was about to make a $44 per share bid for the $10.4 billion direct-sales beauty company Avon Products Inc., which would value the latter firm at $19 billion. Avon shares rose more than 4 percent Tuesday, to close at $34.54.
This story first appeared in the October 13, 2010 issue of WWD. Subscribe Today.
Both a L’Oréal spokeswoman and an Avon spokeswoman declined to comment on the report, originally published in the U.K.’s Daily Mail.
A number of Wall Street analysts expressed skepticism over a possible union.
“I’m unconvinced,” UBS analyst Eva Quiroga told WWD. “It would take L’Oréal too far outside its comfort zone.”
In a research note published Tuesday morning, Quiroga and her colleague William Houston stated, “We would not be surprised if L’Oréal scouted the acquisition trail, given that the group has an embarrassment of riches, with net debt estimated at zero by the end of the year and the stake in Sanofi currently worth 5 billion euros [about $7 billion at current exchange],” they said.
Such an acquisition would allow L’Oréal to increase its sales in emerging markets to 45 percent on a pro-forma basis, from 33 percent of sales last year, the analysts said, and would be a particular boost to its Latin American business. But it would also mean the company would draw 30 percent of its business from direct sales. The French firm has little experience in the direct-sales market, where competition is strong, particularly in the emerging markets L’Oréal is courting, from brands like Brazil’s Natura and Sweden’s Oriflame, particularly strong in Russia.
Stifel Nicolaus analyst Mark Astrachan said, referring to Avon and L’Oréal, “I don’t think it makes a ton of sense strategically. You’ve got two different business models.”
Jefferies & Co. analyst Douglas Lane wrote in a research note Tuesday that, at first glance, the paring may seem unlikely, but noted Avon could help L’Oréal achieve a dominant market position in emerging markets. Lane stated, “Avon has 67 percent of its sales in developing markets (i.e., the ‘new countries’) versus only 36 percent for the total cosmetics, fragrance and toiletries industry.”
Chas Manso, an analyst at Evolution Securities, said the rumor had been circulating for a couple of weeks, but he gave it little credence: “Why would they buy the whole of Avon to tap into a couple of markets?”
He said that while Avon is performing well right now, with like-for-like sales up more than its peers, L’Oréal is a company with a long-term growth strategy, looking for acquisitions that fit in with that. Avon does not enter that category, he believes.
Several analysts noted that Unilever’s recent acquisition of Alberto-Culver Co. and Procter & Gamble Co. expressing its interest in Beiersdorf have brought the M&A market, which has been largely dormant for cosmetics manufacturers during the recession, back to life.
“There has been a bit of an M&A frenzy following the buyout of Alberto-Culver, and everyone is scrambling for sources of growth,” Manso said. “M&As are back in town.”