Coty strengthened its hand in the $10bn battle for fellow cosmetics group Avon after its parent unveiled plans to tap the markets for some $2bn.
JAB Holdings, the privately held vehicle that owns Coty, said it would sell 36m shares in Reckitt Benckiser, the UK-listed household and personal care company. Based on Wednesday’s close, the 4.9 per cent stake would be worth some £1.3bn.
Shareholders in Avon were quick to interpret the move as a sign that Coty was building up its resources in readiness for a bid, driving the share price of the direct-sales group up 9.3 per cent to $21.60. Avon’s management has rebuffed the offer, which it sees as undervaluing the troubled company.
“We see this as a way for JAB to help Coty fund the bid for Avon or for other companies that Coty may decide to pursue,” wrote Pablo Zuanic, analyst at Liberum Capital, in a note.
JAB said the share sale reflected a “desire to diversify its portfolio and invest in new opportunities” and added that Reckitt Benckiser remained its most important investment.
Avon and Coty both declined to comment.
Avon has been grappling with a host of financial and legal troubles, including bribery allegations and a US Securities and Exchange Commission investigation into the company over its contacts with analysts.
Speaking last month, Bart Becht, chairman of Coty and former chief executive of Reckitt Benckiser, said Coty had lined up $5bn in equity financing and was confident of raising a further $9bn of debt to fund its $10bn unsolicited bid for Avon and subsequent refinancing.
Analysts have suggested that further equity infusions could come from 3G Capital, founded by the controlling Brazilian shareholders of Anheuser-Busch InBev, and the global brewer itself.
3G recently raised $1.4bn from the sale of its stake in Burger King. The trio of companies are linked by Peter Harf, chief executive of JAB, who last year stood down as chairman of ABI and has served as a director of Burger King. Moreover, add Bernstein Research analysts, Mr Harf brought Mr Becht into Reckitt Benckiser and Mr Becht succeeded Mr Harf as chairman of Coty.
Although it is liquidating part of its stake in Reckitt Benckiser, JAB stressed its support for the maker of Finish dishwasher tablets and Nurofen painkillers.
Reckitt consistently outperformed its peers under Mr Becht but began losing momentum shortly before he passed the baton to Rakesh Kapoor last year. Mr Kapoor has subsequently stamped his own strategic imprint on the company, and its shares have outperformed the broader market in the past few months.
JAB said it is a strong believer in Reckitt Benckiser’s new management team and recently announced strategy. JAB aims to keep board representation and a minimum shareholding of at least 10 per cent.
Avon has rebuffed the smaller Coty, calling the approach “opportunistic” and the $23.25-a-share offer inadequate.
It strengthened its defences last month by announcing the appointment of Sheri McCoy, a former Johnson & Johnson executive, as its new chief executive, underlining its determination to stay independent.
Avon has contended with operational and legal troubles that have weakened the direct cosmetics seller’s brand. In the summer of 2008, Avon launched an internal investigation of its adherence in China to the Foreign Corrupt Practices Act, the US law which forbids bribery of officials overseas to win or retain business.
The direct-marketing company said later that year it had contacted the SEC and Department of Justice, which both began investigations. In 2010, Avon suspended four executives in relation to the probe.
Last October, Avon revealed a second SEC investigation into the company. It said it had received a subpoena requesting information relating to the company’s communications with financial analysts as part of an inquiry into selective disclosure. Andrea Jung’s resignation from the post of chief executive followed two months later.