Bloomberg News

Coty Raises Avon Bid to $10.7 Billion; Buffett Backing

May 10, 2012

Photographer: Ron Reeves

Photographer: Ron Reeves

Coty Inc. boosted its offer to acquire Avon Products Inc. (AVP:US) to about $10.7 billion and said Warren Buffett’s Berkshire Hathaway Inc. (A:US) will provide financing as the perfume-maker seeks to kickstart negotiations with Avon.

The $24.75-a-share offer, up from a previous bid of $23.25, is subject to due diligence and other conditions, New York-based Avon said in a statement today that included a letter from Coty. Berkshire will provide $2.5 billion of the more than $5 billion in equity from BDT Capital Partners, which is backing the bid, according to a person familiar with the matter.

Coty Chairman Bart Becht is working to draw Avon into a deal that would add a new door-to-door distribution channel for Coty’s cosmetics and more than twice its $4.5 billion in annual sales. Avon rejected Coty last month, saying the bid undervalued the company and that it was working on a turnaround. Avon said today it will consider Coty’s letter “in due course.” The offer will be withdrawn by May 14 if Avon doesn’t enter discussions, Coty said.

“It certainly increases the pressure now that you have Berkshire Hathaway involved, that you have an upped bid, that you have a deadline,” Ali Dibadj, an analyst at Sanford C. Bernstein & Co. in New York, said in an interview.

The Wall Street Journal reported earlier today that Berkshire was providing $2.5 billion in financing.

Coty asked Buffett’s permission to use his name in the release to send a message to Avon’s board and investors that they were serious and show the depth of their financial and strategic support, said people familiar with the matter.

The company established the May 14 deadline for a couple of reasons, said these people. Becht wants to pursue an initial public offering, a course it had been pursuing earlier this year, if he can’t seal the Avon deal, said one of these people.

Money Tied Up

Also, investors with BDT Capital don’t want their money tied up for weeks without any sign of resolution, said another person. Coty will continue to press larger investors on the idea that Avon should be able to study an independent path with its new CEO while also starting deal talks with Coty, said these people.

Avon fell 2.7 percent to $21.01 at 1:12 p.m. in New York. The shares are trading about 15 percent below Coty’s offer, the second-biggest gap among pending U.S. deals larger than $1 billion, according to data compiled by Bloomberg, suggesting investors aren’t convinced the bid will succeed.

Coty’s offer still undervalues Avon, which is worth more than $30 a share, based on sales multiples at comparable companies such as Estee Lauder Cos. (EL:US), said Josh Strauss, co- portfolio manager of the Appleseed Fund at Pekin Singer Strauss Asset Management in Chicago. Avon has potential to expand sales in emerging markets, Strauss, whose fund oversees 1 million shares of Avon, said today in a telephone interview.

Berkshire Backing

Coty said in its letter that in addition to Berkshire’s equity financing for its bid, JPMorgan Chase & Co. (JPM:US) would provide debt financing.

Yesterday JAB Holdings B.V., a subsidiary of the company that controls Coty, said it plans to sell $2 billion of Reckitt Benckiser Group Plc (RB/) shares to fund deals. Vienna-based Joh. A. Benckiser SE is the majority owner of Coty.

Berkshire had $37.8 billion in cash as of March 31. The company’s involvement may make the unsolicited offer less threatening to Avon because Buffett prefers to be seen as reassuring, said Jeff Matthews, whose hedge fund Ram Partners has a long position on Avon.

‘Listen Up’

“I don’t think there’s any better way to get Avon’s attention than to say, ‘I’ve got the smartest investor in the world, with the deepest pockets in the world behind me, listen up,’” said Matthews, who is also the author of “Secrets in Plain Sight: Business & Investing Secrets of Warren Buffett.”

Buffett agreed in 2008 to help finance Mars Inc.’s purchase of Wm. Wrigley Jr. Co. for about $23 billion. Berkshire acquired $4.4 billion of 11.45 percent Wrigley subordinated notes and $2.1 billion of 5 percent Wrigley preferred stock.

Berkshire has invested in other consumer-products companies, and counts Johnson & Johnson and Procter & Gamble Co. among its 10 largest stockholdings, according to data compiled by Bloomberg. J&J, the New Brunswick, New Jersey-based maker of Band-Aids, is the world’s second-largest seller of health-care products. Cincinnati-based Procter & Gamble Co., the maker of Pampers diapers and Gillette razors, is the world’s largest consumer-products company.

Berkshire, based in Omaha, Nebraska, prefers to invest in companies “possessing a powerful world-wide brand,” Buffett said in a letter to shareholders in 2008, citing Gillette as an example.

Cosmetics Deals

There have been about 280 takeovers in the cosmetics and toiletries industry in the past decade, the largest being P&G (PG:US)’s $57.3 billion takeover of Gillette Co., according to data compiled by Bloomberg. The median price to earnings before interest, taxes, depreciation and amortization paid in almost 30 of those deals was 10.8 times, in line with Coty’s new offer.

After not talking in the weeks following Coty’s offer on April 2, advisers to Coty and Avon have in the last two weeks begun having some conversations about Coty’s proposal, people familiar with the matter have said. The talks, which had focused on Coty’s concerns about liabilities at Avon and internal departures of employees, had yet to progress toward a deal, said the people, who declined to be named because the discussions are private.

Coty, also based in New York, has been frustrated that Avon shareholders haven’t pressed Avon to discuss the merger, said one of these people.

Richmont Bid

Richmont Holdings, a closely held company that invests in consumer brands, is working on its own bid for Avon, according to two people familiar with the matter.

Avon last month appointed former J&J (JNJ:US) executive Sherilyn McCoy as chief executive officer to reverse three years of profit declines and complete an investigation into its overseas business practices. The company and the U.S. Securities and Exchange commission are probing whether executives bribed foreign officials in violation of the Foreign Corrupt Practices Act.

To contact the reporters on this story: Lauren Coleman-Lochner in New York at; Jeffrey McCracken in New York at

To contact the editor responsible for this story: Robin Ajello at

The Good Business Issue

Companies Mentioned

  • AVP
    (Avon Products Inc)
    • $9.26 USD
    • 0.04
    • 0.43%
  • A
    (Agilent Technologies Inc)
    • $41.38 USD
    • 0.25
    • 0.6%
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