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Market Update

Avon-Coty Combo Could Be Messy

Avon's board may have to reconsider should the offer price climb higher, but a merger could still face several complications.

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We are leaving our $25 fair value estimate for  Avon Products (AVP) unchanged in the wake of the news that the firm has received an unsolicited offer of $23.35 per share in cash (representing a total offer of $10 billion) from privately held beauty company Coty. Avon's board has rejected the offer, believing it substantially undervalues the firm and calling out that it represents a multiple of 1.1 times trailing-12-month revenue and 8.7 times trailing-12-month EBITDA.

While Avon faces a perfect storm of problems at the moment, it's clear that Coty smells blood. The perfume maker, which posted sales of about $4.1 billion for the year ended June 30, 2011, believes a combination would benefit Avon's direct salesforce as the representatives would have Coty's fragrance brands such as Lady Gaga and Calvin Klein to distribute. Any such deal would probably be quite messy, in our view, as Coty has strong department store relationships in the United States. We doubt these retailers would enjoy seeing the same brands that sit at department store counters distributed by direct sales representatives. Additionally, outside the U.S., in markets such as Brazil and Russia, we are not sure how much traction many of Coty's celebrity brands would have. Growth in the fragrance category can be fairly volatile, and while currently it appears to be doing better than it has in some time (based on results we've seen from competitors like  Estee Lauder (EL)), it's also suffered significant category contraction in recent years. We're not sure how compelling Avon representatives would find Coty's product offering over the long run.

Lauren DeSanto does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.