Late Monday evening, the direct seller’s would-be suitor Coty pulled its offer to buy the beleaguered company, ending a two-month effort to engage Avon’s management and board in negotiations.
Investors are taking Coty’s rescinded offer seriously, signaling they think the deal is finally dead by sending Avon shares sliding 9.7 percent to close at $18.71 on the New York Stock Exchange on Tuesday. Several Wall Street analysts expect Avon’s stock price to remain volatile at least through the next quarter, as the company’s newly installed chief executive officer, Sheri McCoy, works to put together a turnaround plan.
Avon’s declining stock price could potentially prompt another bidder to swoop in, and make a play for the company. Before Avon’s troubles came to a crescendo last fall, at the end of the firm’s second quarter on June 30, Avon’s shares closed at $28 and its market capitalization reached $12 billion. By comparison, at the close of the first quarter on March 31, 2012, both Avon’s shares and market cap had fallen by nearly 34 percent, to $18.52 and $8 billion, respectively.
As for Coty, industry observers speculated that it may move its plans for an initial public offering to the front burner once again. Sources said that prior to its initial bid for Avon, Coty spent several months working with an investment bank to actively prepare for an IPO. Others suggested that Coty — which has made several large-scale acquisitions in the last few years — may look for another beauty firm to buy.
The market is full of potential targets at present — ranging from Urban Decay cosmetics to Perricone MD skin care — but finding a company that can speed Coty’s advancement in emerging markets may prove difficult. At the outset, Coty chairman Bart Becht said Avon’s presence in emerging markets is what made it so attractive to Coty — despite the direct seller’s poor earnings results, ongoing inquiries by the Securities and Exchange Commission and operational missteps in key markets.
Avon’s refusal to engage in talks with Coty over the last several months has left some industry watchers in disbelief. “It’s strange that there was no talking going behind the scenes,” said one Wall Street analyst, who requested anonymity. Still, last week Avon’s board seemed to be on the verge of considering sitting around the table with Coty. On May 10, following Coty’s sweetened bid of $24.75 a share, or $10.65 billion, Avon said its board “will consider the letter in due course.”
In an internal memo e-mailed to Avon employees on Tuesday, McCoy wrote, “Last night, Coty Inc. announced that it has withdrawn its offer to acquire Avon. Over the next few days it’s possible that there will be continuing commentary in the news media about this matter. As we’ve said before, the task before us is to stay focused on stabilizing our business and take the actions needed to restore Avon to growth. With your support and continuing hard work, I’m confident we can succeed.”
Ironically, later that morning at a regularly scheduled meeting for staff of Avon’s North American business, “I Will Survive” was one of the tunes blasted over the speakers, noted one Avon employee. McCoy addressed attendees by video at the meeting, hosted by Jorge Martinez Quiroga, senior vice president and president of North America, and reiterated the comments in her memo that morning, according to a person present. Today, Avon staffers were on the phone calling representatives to instill confidence in the company. Avon’s most recent restructuring has resulted in 299 job losses since March, said an employee, and more layoffs are expected take place over the next several months.
For employees, analysts and investors, the roller-coaster ride that began in March with Coty’s initial bid of $23.25 a share, or $10 billion, seems to be over — or at least on pause. A week ago, Coty attempted to get Avon’s attention once more with the higher bid — and a new investor, Warren Buffett’s Berkshire Hathaway Inc. It also gave Avon a deadline of May 14 to begin engaging in talks. On Sunday evening — on the eve of that deadline — Avon stated it planned to respond to Coty’s latest offer within a week. But Becht was done with waiting, and yanked the offer off the table late Monday evening in letter to Avon’s board stating, “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. Two months is enough. Consequently, as our deadline to begin discussions expired today, our proposal is withdrawn.”
Becht’s letter expressed Coty’s frustration with Avon’s measured response to its higher offer, stating, “Yesterday, we received a two sentence e-mail indicating, without explanation, that Avon’s board would need another week to consider our request. Since receiving your e-mail, we have reached out to Avon’s board, management and advisers to understand why additional time is needed, but we have received no explanation. 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.”
It also reminded Avon of the strength of its proposal, declaring that it had equity commitments of more than $5.8 billion from investors, including Buffett.
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