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April 2, 2012 7:44 pm
One company offers to buy another, offering a modest premium. The target bats the offer away as inadequate. So shares of the target surge past the initial offer? Not in the case of fragrance maker Coty’s bid for Avon Products.
On Monday, the day of Coty’s $23.25 bid, a 20 per cent premium to the previous close, Avon’s shares closed at $22.68. The bid values Avon at 8.5 times forward earnings before interest, taxes, depreciation, and amortisation – middling at best for a beauty company. And the stock traded over $30 within the last year. So why are shareholders not expecting more? A merger makes sense on several levels. For Coty, Avon offers needed distribution in the emerging world. Ownership by a private company would allow Avon to get its house in order without nagging from investors, and absolve it from paying its dividend, which now consumes over 100 per cent of its free cash flow.
Perhaps shareholders have concluded that Avon’s board will not sell while their company is in turmoil. Avon has been in restructuring mode for half a decade, but sales have grown by an average of 2 per cent annually over the past three years and margins are falling. The restructuring continues even as the company searches for a new chief executive and deals with two serious investigations (one on bribery in emerging markets, the other about contacts with analysts). But the board should recognise that the company’s chances of recovery were already reflected in last week’s price – a fifth below Coty’s bid. Time to come to the table.
It didn’t help that Coty’s offer was painfully limp. Its board made a big to-do of its unwillingness to go hostile, and hinted at wiggle room on price, rather than making a strong offer – with committed financing – to start with. Get on with it, both of you.
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