Will Avon Products be another Takover Target?
Jonathan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
In April of of this year, Coty Inc., a German fragrance maker, launched a takeover bid for Avon Products (NYSE: AVP) at $23.25. To make the offer more appealing, Coty raised it in May with "...Avon bid with (Warren) Buffett's blessing" to $24.75. Berkshire Hathaway (NYSE: BRK-A) (NYSE: BRK-B), headed by Warren Buffett, was to provide $2.5 billion in financing for Coty to acquire Avon Products. About the increased offer, Michael Bigger, founder of Bigger Capital, which owned Avon shares, stated that, "I don't think they will (take up the offer). They know that the current bid is too cheap. Cosmetics is a great business. It deserves a premium. If I were them, I would ask for $28 or more."
Unable to reach a deal, Coty Inc. withdrew its bid for Avon Products. At present, Avon Products is now trading around $15.70 a share. That is more than one-quarter lower than the offer made with Warren "Buffett's blessing" and Berkshire Hathaway's money; and about half less than the $28 share price value stated by Michael Bigger.
Obviously, the board of directors of Avon Products erred in not reaching a deal with Coty Inc. as the stock is trading at a market capitalization of $6.79 billion, almost $5 billion less than the $10.65 billion offer.
With the $1.8 billion investment of activist investor Bill Ackman of Pershing Square Capital Management in Procter & Gamble (NYSE: PG), there is sure to be an increased focus on consumer stocks with a global reach. Procter & Gamble sells products in more than 180 countries, primarily through stores. Avon Products sells its items in more than 100 countries utilizing a direct sales model with approximately 6.4 million active Avon Sales Representatives.
It is the present business model and its upside that is the appeal of Avon Products, both as a takeover target and a turnaround candidate. Coty, which sells more fragrances than any other company, wanted Avon Products, the largest cosmetic seller in the world, to extend the reach of its offerings such as Calvin Klein and Kate Moss perfumes. At present, Avon Products is much like where McDonald's (NYSE: MCD) was in early 2003.
Trading at over $100 share earlier this year and now around $92.60, McDonald's was selling at about $12 a share in early 2003. Like Avon Products today, much of the McDonald's approach was outdated. McDonald's turned it around by bringing in a healthier menu, going "green" in a variety of ways, modernizing its facilities and focusing on its advertising message, particularly in adapting to social media. The Facebook page for McDonald's has 21,212,163 "Likes."
By contrast, Avon Products' Facebook page as 717,886 "Likes." Chuck Liddell, the MMA fighter has 921,722 "Likes" for his Facebook page. Embracing Facebook, and other social media avenues, is where Avon Products needs to head and is now working at to improve.
Market penetration is a key part of every direct seller's success story; and a greater social media presence in Facebook, LinkedIn and others will increase sales for Avon Products. For the purposes of Avon Products, Facebook and LinkedIn are primarily networking tools that will also allow for increasing sales through contacts, contests and other methods. This is coming from the strength of Avon, its dedicated sales force, that claims that while the company has developed e-catalogs along with iPhone and Android apps for various items,"sales representatives say [the company] isn't doing enough to help them win customers through new tools like social media, smart phones and tablets."
On LinkedIn, the recommendations, groups and answers functions are very useful for establishing sales opportunities. Satisfied customers can leave recommendations for Avon Sales Representatives and their products. The groups components of LinkedIn allows direct sales and product line to be established. Moving products can be facilitated through the answers section. While not dedicated to business like LinkedIn, Facebook offers the same uses.
The world is also getting bigger and richer in emerging market countries where Avon Products is the most formidable and has a competitive advantage with its 6.5 million person sales army. Brazil is Avon's strongest market. According to a recent report by The McKinsey Global Institute of McKinsey & Co, "Urban world: Cities and the rise of the consumer class," there will be more than one billion new members of "the consumer class" living in cities in emerging market countries like Brazil.
The burgeoning middles class in third world countries has been the growth story of recent years and it will be for the future. Even during The Great Recession, the consumer class expanded emerging market countries. According to financial columnist Jim Jubak, the continuing growth of the emerging market middle class will be the most important investment trend of the decades ahead. That is a major reason that the portfolio of Berkshire Hathaway is bulging with shares of global consumer companies such as Coca-Cola and Kraft; and that Warren Buffett was in India earlier this year scouting for investment opportunities.
Not only is the developing world where Avon Products is strongest, that is the ideal target group for direct selling. At present, only about 20% of the Third World use the Internet compared to almost 70% in developed countries. Direct selling by Avon Sales Representatives will still be far more effective than social media activities. With the urban population exploding, direct selling will be greatly facilitated.
Due to the failed bid from Coty, the share price of Avon Products has fallen more than 27% for the last quarter. The sales-to-price ratio is now 0.60. Coty Inc. withdrew its offer less than four months ago as Avon "..didn't explain to Coty why it was taking more time to respond to its proposal." The company was and still is appealing as a business. Avon Products is attractive as a turnaround stock for individual investors to buy or a takeover target for another company to acquire.
jonathanyates13 has no positions in the stocks mentioned above. The Motley Fool owns shares of Berkshire Hathaway and McDonald's. Motley Fool newsletter services recommend Berkshire Hathaway, McDonald's, and The Procter & Gamble Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.