Olá Coty. That phrase would be music to the ears of Bart Becht and the rest of his Coty team, as they eye a possible acquisition of Avon Products Inc. as a doorway into the lucrative Brazilian fragrance market.
This story first appeared in the April 4, 2012 issue of WWD. Subscribe Today.
Avon may have spurned Coty Inc.’s $10 billion bid, but that hasn’t stopped Becht & Co. from sketching out his vision.
Becht, who is Coty’s chairman, told WWD on Tuesday an acquisition of what he called Avon-Coty would provide new, innovative products that can enhance the lineup of Avon brands. Avon, for its part, would give Coty a foothold in emerging markets like Brazil, which is dominated by the door-to-door selling model. “Coty has virtually no presence at all in Latin America, and in Brazil two-thirds of the business is done door to door,” said Becht.
He said a deal would allow Coty to use Avon’s legion of 6.4 million representatives to sell a select portion of its mass market products. “Coty will enrich the basket of products Avon representatives can sell,” said Becht, who took over as chairman in November, following his former post as chief executive officer of Reckitt Benckiser plc.
Coty’s portfolio includes both prestige and mass market brands, and keeping products separately flowing in those two distribution channels is a key skill set of the company, said Becht.
As for how aggressive Coty plans to get in its pursuit of Avon, Becht said, “We will not go hostile, but at the same time we are counting on shareholders to convince the board to accept the deal. We are asking for a due diligence and negotiation period of one month.”
Avon has had to fend off unwanted suitors in the past. In 1989, it kept Amway Corp. at bay, forcing the direct seller to withdraw its offer of $39 a share.
Becht acknowledged that, earlier this year, Avon and Coty had discussions regarding Avon buying Coty funded with stock, but those discussions “never went anywhere.”
Asked who would lead Avon-Coty, should a deal come to fruition, Becht said, “Coty has a highly successful management team with [ceo] Bernd [Beetz]. We also would need a large portion of Avon management to understand the door-to-door model.”
Coty stated publicly on Monday that it “believes that its proposed price is a full and fair one, based on public information about Avon, and it is prepared to consider increasing its price if Avon can demonstrate through diligence that there is greater value.” Becht told WWD on Tuesday, however, that Avon’s Security and Exchange Commission troubles, such as the ongoing bribery probe, could make the Avon business worth less.
The move comes as many financial observers expected Coty to pursue an initial public offering as early as this year.
“We’ve talked about pursuing an IPO in the past, but going public at the same time as making an acquisition is unlikely to happen because both initiatives would require substantial effort,” said Becht.
Morgan Stanley analyst Dara Mohsenian wrote in a research note Tuesday, “We view Coty’s bid as a viable offer, with the backing of equity from Coty shareholders, and the involvement of Becht and based on limited publicly available financial information.”
Investment banker Elsa Berry, head of Houlihan Lokey’s cross-border consumer coverage, said of Coty’s offer, “I don’t see Avon brushing this away. My guess is that Coty will increase its offer. It’s a smart move on Coty’s part, but Avon is a different business model and it’s a turnaround.”
As for whether more potential buyers could begin to circle Avon, one Wall Street source said, “I never thought we’d get one bidder.”
Coty’s bid is the latest in a heap of distractions that seem to have derailed Avon’s ceo search. Avon has said little about the progress of its search for Andrea Jung’s replacement. And many executives whose names surfaced as potential successors to Jung have denied any interest in the post. A potential candidate would now have to sign up for a job description that includes overseeing an ongoing SEC investigation, executional issues in key markets and an acquisition play by Coty — all while reporting to Jung, who plans to take on the role of executive chairman once a new ceo is in place.
In an regulatory filing released Tuesday, Avon stated Jung’s total executive compensation fell 23.5 percent to $10.1 million in 2011, from $13.2 million the prior year. Her base salary remained unchanged at $1.4 million. Jung also received stock awards valued at $4.8 million, nondeferred compensation of $3.7 million and other compensation of $207,227.
Several observers cast doubt on Coty’s ambition to add Avon to its moniker, citing what they deemed as a less-than-unified acquisition strategy. Coty in the past has shown an appetite for bold moves. In 2005, the company paid $800 million for Unilever’s prestige fragrance division, Unilever Cosmetics International, which added the Calvin Klein fragrance license, among others, to the portfolio. Two years later, Coty acquired DLI Holding Corp., which was best known for its Sally Hansen brand, also for an estimated $800 million. And in late 2010 alone, Coty bought OPI Products Inc. and Philosophy Inc. — for an estimated $1 billion each — as well as Chinese skin care company TJoy and the German beauty brand Dr. Scheller Cosmetics AG. Several industry observers asserted that Coty overpaid for Calvin Klein, and then again for OPI and Philosophy, with the latter company lacking international exposure.
“Coty bought these companies to increase its overall revenue and get ready for an IPO,” said one industry observer. “Now it needs to combine different business models and price points while relying on a small senior management team. And still everyone thinks of Coty as a celebrity fragrance business.”
Another financial source said, “I don’t think Coty fully appreciates how difficult the direct-selling business is. But Coty is a land-locked company and it has no other way of getting into these emerging markets.”