New Movement in Coty’s Takeover Bid of Avon

After reports that Switzerland-based Jab Holdings, which owns 80% of Coty, would sell its 15.5% stake in Reckitt Benckiser—which owns beauty brands such as Calgon, Clearasil and Veet, among others—in order to raise capital for the proposed Avon acquisition by Coty, Avon released the following letter from Coty. Dated May 9, 2012, the letter reiterates Coty’s interest in the proposed deal with new investors, as well as a willingness to discuss an increase of its proposed acquisition price from $23.25 per share to $24.75 and puts an expiration date of May 31 on the deal, as well as a deadline of May 14, 2012, on beginning negotiations.

On May 13, Avon's board of director released a statement saying that, in conjunction with the company's management team and its financial and legal advisors, it is currently considering Coty's letter, further detailed below, and expects to respond within a week.

Board of Directors of Avon Products, Inc.
1345 Avenue of the Americas
New York, NY 10105

Dear Members of the Board:

Since we made public our non-binding proposal to acquire Avon for cash (the "proposal") more than a month ago, we have spent significant time listening to your shareholders and analyzing public information, including your most recent quarterly results. We continue to believe that our proposal would provide compelling value to Avon's shareholders relative to a difficult and uncertain multi-year turnaround on a stand-alone basis. The combination of Avon and Coty would create a global beauty company with broader innovation, branding and execution capabilities to benefit its customers, representatives and associates around the world.

We have been disappointed by the current stalemate. As you know, we contacted Avon last week in an effort to break this deadlock. We indicated that we were prepared to engage in non-public discussions and discuss an increase to our proposal of $23.25 if substantiated through a three-week diligence process.

We remain keenly focused on understanding Avon's operational and financial challenges, evidenced by your disappointing first quarter results and outlook, as well as your recent credit ratings downgrades. We need to confirm our synergy estimates, the availability of which will be critical to our final valuation and the reinvestment required to implement a turnaround of Avon. In particular, we are very interested in understanding the components of your SG&A expense line item as we evaluate how to increase economic opportunities for your representatives relative to controlling overall corporate spending. We also need to better understand your ongoing Foreign Corrupt Practices Act investigation and litigation, and what it will cost to address operational and financial problems and these liabilities.

We are prepared to sign a confidentiality agreement with standstill provisions that would restrict us from taking further public steps in seeking to acquire Avon so long as you agree in good faith to provide us with requested information on a timely basis. As we have consistently indicated, we and our financing partners will only pursue this proposal on a consensual basis, including having conducted due diligence. Our equity financing sources will include our principal shareholder Joh. A. Benckiser, BOT Capital Partners and certain of its limited partners, and Berkshire Hathaway Inc. Our debt financing will be provided by JPMorgan Securities.

Upon signing the confidentiality agreement, we anticipate we would need only several weeks to conduct expedited due diligence of Avon and finalize the terms of a possible transaction. We have attached to this letter a list of priority diligence items that we believe would enable us to form a definitive view of value beyond where we have arrived based on public information.

When we contacted you again last week, you advised us that Avon's Board of Directors was not prepared to engage in any discussions regarding any revised proposal until Avon had completed a strategic and operational internal review with its new CEO. While we understand Avon's interest in conducting such a review given the significant challenges and uncertainties described in your recent analyst call, this review can and should be done in parallel with exploring the strategic alternative of selling the company so the Board may compare both proposals side by side and make the right choice for Avon shareholders.

In any event, we will not keep our proposal open for the several months that you say you need to conduct your internal review. We and our equity sources are prepared to work until May 31, 2012, to see if we have a mutually agreeable basis for a transaction.  If you are prepared to enter into discussions, we can, prior to this expiration date, determine whether there is an opportunity to provide significant and certain immediate value to Avon's shareholders.

In our final effort to move forward with discussions, we are revising our proposal to $24.75 subject to due diligence and the other conditions described below. This price represents a premium of over 36% to the original undisturbed closing price on March 6, 2012, before our initial proposal of $22.25 and also represents over $1 billion of incremental value to your shareholders, despite a materially weakened outlook for your business. Given the challenges facing your business, we believe the premium is even higher when considering your potential stock price in the absence of a possible transaction. If in our work we find considerably more positives than negatives, we would be prepared to propose a higher price; if we find more negatives than positives, it would be difficult to justify our revised proposal. If after due diligence our final proposal were to be unacceptable to you, we will simply indicate so in a mutually agreeable statement and part company as friends.

In order to end the uncertainty around this transaction for both your organization and ours, we request that you respond to our revised proposal by close of business on Monday, May 14. If you choose not to engage with us, we will withdraw our proposal. Our intention is to submit this letter and our revised proposal to Avon's Board on a confidential basis. However, if you do not enter into discussions with us by May 14, we will have to inform the public markets of the circumstances of our withdrawal.

This letter and our proposal and revised proposal constitute a preliminary, non-binding indication of interest to acquire the outstanding shares of Avon, and our revised proposal is being submitted based on the understanding that it is not an offer that is capable of being accepted and that there will be no binding agreement between us or any commitment or obligation on either party with respect to the revised proposal or a possible transaction unless and until a definitive agreement is executed by Avon and Coty. We reserve the right to discontinue discussions regarding, and withdraw, our revised proposal at any time. Our revised proposal is subject to customary conditions, including, among other things, our satisfaction with the results of due diligence in our sole discretion, the negotiation of a mutually satisfactory definitive agreement, financing and the approval of the negotiated terms of a transaction by our Board of Directors.

I sincerely hope you will agree that your shareholders' interests will be best served by meeting with us to discuss our proposal.


With best regards,
Bart Becht

Read more about acquisitions consultant George Spilka’s take on the global acquisitions market in the coming years here.

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