Coty Called, Avon Didn't Answer
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It is now widely reported that Avon Products (NYSE: AVP) has rejected a $10 billion buyout from beauty company Coty.
Coty (a privately held company) offered $23.25 per share, a 20% premium over Avon's closing price on Friday of $19.36. Avon rejected the offer, saying it "substantially undervalues" the company, and called it “opportunistic” and “not in the best interest of Avon’s shareholders.”
It was Coty that made the takeover public. The company said Monday that it wanted the information public “in order to inform Avon's shareholders of the significant value in a transaction.”
“Our objective is to engage in discussions with Avon and conduct due diligence so that we and Avon can together determine if there is a basis for a transaction... We believe Avon’s shareholders would want their Board to explore with us the benefits to shareholders of a transaction.” Bart Becht, Chairman of the Board of Directors of Coty, said in a statement.
What does Avon have to offer?
Over the past year, Avon brought in $379.1 million cash while it booked a net income of $513.6 million, turning 3.4% of its revenue into free cash flow. In a perfect world, we'd like to see more free cash flow than net income. Fool writer, Seth Jayson, suggests that Avon investors should take a closer look at the underlying numbers in the company's operating cash flow and its sources, which are less than optimal.
Avon's net income over the last five years has been commendable, rising from $701 million in 2007, to $710 million in 2011. The company bought back a great deal of its own stock in 2007 when shares were higher, but has not purchased much since then. (For a more in-depth look at this read “What Avon Does With Its Cash”)
Avon's stock yields a dividend of 4.8% (higher than the S&P average), with a fairly high payout ratio of 79%. That number expands to 106% if you consider the free cash flow and new investments the company is making. One major negative that Avon carries is its heavy debt-to-equity ratio of 209%. Over the past five years, Avon's earnings per share have only grown at an average annual rate of 3%, while its dividend has grown at a 6% rate.
Avon has been shopping for new leadership. Andrea Jung, has been the CEO since 1999, and the company is ready to move on. The company prefers new leadership to shake things up and revamp the company, as compared to a merger or takeover by another company. Jung, who would stay on as chairwoman, has not pleased investors with lagging sales and a federal probe into bribery laws overseas.
Avon isn't a sure thing as a stock investment, but to a company, such as Coty, looking to improve its beauty supply line, Avon is more than just cash and inventory. The 125 year old brand name alone has clout and recognition, plus it has a large, and loyal audience, built in sales force, and international presence.
Coty is primarily a fragrances and perfumes company. The Avon product offerings would help Coty branch out and sell more to its already existing audience. Additionally, Avon is a worldwide company, with a presence in emerging markets. It is a far bigger company than just the “Avon Ladies” door to door sales model it it is known for in the United States. Coty received 57% of its $4.1 billion in sales in fiscal 2011 from perfumes, and revenue primarily comes from the US and Europe. Avon's far reaching audience would greatly benefit Coty.
Coty says it originally offered Avon $22.25 per share in early March, but Avon didn't bite. Coty went public after sending three letters to Jung that did not produce positive results.
Coty said it would rename the company "Avon-Coty."
As of the Friday closing bell, shares of Avon were down nearly 50 percent from a year and a half ago. Shares of Avon rose 17.8 percent to $22.80 in morning trading.
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