WWD.com/beauty-industry-news/financial/valuing-avons-worth-no-simple-equation-5844377/
government-trade
government-trade

Valuing Avon’s Worth No Simple Equation

Takeover offer from Coty sparks questions about company's valuation.

NEW YORK — What’s Avon Products Inc. worth?

That’s the question on the lips of the beauty world and on the minds of Coty Inc. chairman Bart Becht and Avon’s chief executive officer Andrea Jung.

Coty, a would-be acquirer, proposed $10 billion, but the direct merchant refused to engage into negotiations and then roundly rejected the offer as too low when Becht took his case directly to shareholders Monday.

The fragrance firm’s offer for Avon amounted to $23.35 a share. Investors honed in on that number and, after driving the stock up 17.3 percent once the offer went public, the issue closed up 2.5 percent at $22.75 Wednesday. Avon’s stock price, which has mostly traded in the high teens since last fall, has a 52-week high of $31.60.

RELATED STORY: Coty Chairman Outlines Vision for Deal With Avon Products >>

Linda Bolton-Weiser, a managing director of Caris & Co., said Avon’s board should dismiss offers below $28 a share, or about $12 billion.

“Coty’s key overriding interest in Avon is to gain automatic geographic diversity and become a truly global beauty company, as well as to gain product category diversity, especially through adding Avon’s skin care franchise,” she said.

If Coty does move to sweeten its bid or another suitor comes knocking, the offer might require more art than science since a close look at Avon could leave one with more questions than answers.

The direct seller’s troubles could prove to be more costly and cumbersome than a potential buyer would want to take on in the final evaluation. Avon has been in restructuring mode for years and is looking for a successor for Jung as ceo, prompting a chorus of analysts to refer to the company as a “rudderless ship.”

“By going public with Coty’s offer, Bart is forcing the board to consider him for Avon’s ceo post,” one analyst noted.

Javier Escalante, executive director at Consumer Edge Research, said, “There is a credible risk that earnings will continue to drop, as investors don’t know what level of reinvestment it will take to stabilize key markets like the U.S. and Brazil. Avon is in structural decline. The company has been in restructuring [mode] since 2005.”

RELATED STORY: Avon’s Revenues by Region >>

Avon’s entry into China has been marred by a bribery investigation that is expected to continue to cost the company dearly.

The firm received the go-ahead from the Chinese government to start a direct-selling business in the country in April 2005. Just over three years later, the company began an investigation into whether bribes helped open up the market. The Securities and Exchange Commission and Justice Department are now also looking into the matter, which touches on other markets as well.

“It appears there may have been high-level management knowledge and involvement of the payments,” said Richard Cassin, author of “Bribery Abroad: Lessons From the Foreign Corrupt Practices Act.” “If that is the case, the punishment for Avon could be heavy. It’s impossible to predict, but criminal and civil penalties could reach $100 million or more, based on similar cases.”

It’s not the size of the bribe that determines liability under the statute, but the size of the resulting income.

“The company’s total financial liability could equal three times the profits made possible by the bribes,” said Andy Spalding, who teaches international business law at the Chicago-Kent College of Law.

If any executives tried to bury the evidence of the bribe, they could also face up to five years in prison.

RELATED STORY: A Closer Look at Coty >>

The validity of the contract that involved bribes is a matter governed by local laws.

“If the evidence becomes really publicized and very damaging to the Chinese government’s reputation, you could see the Chinese government…crack down on the people responsible for this,” Spalding said.

So far, the investigation has cost Avon $247.6 million over three years.

“That’s clearly one of the largest, most expensive internal investigations,” said Mike Koehler, assistant professor of business law at Butler University. “What an ultimate enforcement action is going to be I think is anyone’s best guess. Avon has already spent a lot of money on this that will not be the responsibility of an acquirer.”

Still, Koehler said an acquirer could have some sense of the risk associated with the investigation, though uncertainties would linger.