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Hard to resist

10 May 2012 By Agnes T. Crane

Coty is making its advances harder for Avon Products to resist. The European fragrance maker has given the down-in-the-dumps U.S. makeup firm until Monday to engage in discussions. But Coty has raised its offer to $10.7 billion, added Warren Buffett’s cash and blessing, and hinted at the possibility of a still higher price – while Avon is, if anything, looking weaker.

Since Coty went public with its interest a month ago, Avon has hired Johnson & Johnson veteran Sheri McCoy to replace long-time Chief Executive Andrea Jung. And it had other reasons beyond uncertainty over Jung’s successor for pushing away Coty’s initial approach. It’s traditional to resist the first offer, of course. And the European company is much smaller, with less than half Avon’s revenue. Being privately held, raising more than $10 billion in cash isn’t an easy task. Breakingviews reckoned when Coty’s initial approach was revealed that beyond what the company could raise itself, wealthy backers might have to stump up $5 billion or more.

But Coty had Buffett’s preferred banker, Byron Trott, in its camp. Together with the nature of Avon’s business, which fits the Sage of Omaha’s criteria reasonably well, that made Berkshire’s involvement a possibility even then. Not only does Buffett’s company have $38 billion of cash on its balance sheet, but his backing for the deal lends credibility to Coty’s ability to finance it.

In his letter outlining the increased offer and Berkshire’s involvement, Coty Chairman Bart Becht also indicated that the offer price – currently $24.75 a share – could go higher still if Avon’s books check out. That’s a carrot for Avon’s owners, whose shares were worth more than $30 apiece less than a year ago but then slid to under $20 before Coty’s interest emerged.

Meanwhile, Avon’s own finances are looking increasingly shaky. First-quarter profit, announced last week, plummeted 82 percent from a year earlier, raising concerns about whether McCoy will have the financial headroom to pay for another makeover of the company without putting its cherished dividend on the chopping block next year. It all adds up to suggest that Coty now deserves a hearing.


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