A Coty and Avon merger would suit both parties
Coty, the world’s largest fragrance maker best known for its range of celebrity fragrances from Beyonce, JLO and Lady Gaga amongst others; is trying to acquire the Avon cosmetic company. If successful this would just be their latest acquisition of a cosmetics company, following their takeover of Dr Scheller Cosmetics, OPI Products, Philosophy and TJoy in the last two years. However the attempted acquisition of Avon is their most ambitious yet and to date all offers, the latest of which is for $10 billion or 8 times EBITDA, have been rejected out of hand by Avon as being unwanted. While the current offer undervalues the company, I think ultimately a merger would benefit both companies.
Avon, best known as the door-to-door cosmetics company is the larger of the two companies with revenue of $11.3 billion (compared to Coty’s $4 billion), but is going through a significant period of difficulty that includes falling revenue, a share price that fell by 45% in 2011 and an investigation into allegations that executives of the firm bribed officials in China. It’s also got the difficult challenge of replacing long standing CEO Andrea Jung, after she announced her decision to step down last December. Many of these issues would be resolved by merging with Coty.
Coty’s and Avon’s operations are different enough to make a merger mutually beneficial. Avon sells make-up and skin cream primarily through independent sales representatives and gets about two-thirds of its revenue from emerging economies such as Brazil, where it’s been losing market share to domestic rival Nautica. Coty on the other hand sells scent and nail polish through retail outlets in developed countries. Additionally a merger would solve Avon’s successor problem and for Coty, help them realize their ambition of becoming a $7 billion company by 2015.
As things stand a prospective deal would need an improved offer from Coty as the current offer at just 8 times EBITDA is a major undervaluing of the company, considering Playtex and Alberto-Culver were both acquired at 11 times EBITDA and Gillette at 16 times. Coty revealed that they would be prepared to offer more if Avon could prove greater value through diligence, this was immediately dismissed as a poorly veiled attempt to inspect Avon’s financial records.
All this talk is just posturing because both companies need each other. Avon needs a change in direction that Coty would bring, while Coty needs Avon to realize its dreams of becoming a major fragrance and beauty house; as such I fully expect the deal to be completed within the next couple of months.