By Phil Wahba
(Reuters) - AVON (AVP.NY)Products Inc on Monday rejected a $10 billion offer from smaller beauty products company Coty Inc that puts it into play as it faces sliding sales and a bribery probe.
Shares of the world's largest cosmetics direct seller rose more than 15 percent on speculation that a higher bid would end in a sale of the company -- known for its "Ding Dong, Avon Calling" advertisements in the 1950s and 1960s. The share move put more pressure on a board already trying to find a new CEO to oversee a top-to-bottom review of the company.
Coty Inc, whose top products include perfumes for Beyonce, Lady Gaga and Madonna, in March sent outgoing Avon Chief Executive Andrea Jung three letters detailing the offer. The company also said it was willing to raise its bid, and said it went public after failing to get Avon to sit down and discuss a deal.
In a statement on Monday, Avon rejected the offer, saying it "substantially undervalues" the company and said a new CEO will create a "greater opportunity" to increase Avon's value beyond what Coty was offering.
At least one shareholder agreed.
"The new CEO should have time to develop a strategy and make that transparent to the market before Avon should ever be dealing with a buyout offer," said Shawn Gault, portfolio manager at Kempner Capital Management Inc, which holds 218,135 Avon shares according to Reuters data.
"There is a lot more value in Avon," he added.
Investors and analysts predicted that Coty, which has already raised its bid once, would do so again.
Michael Bigger, founder of trading firm Bigger Capital, called the offer "too cheap."
But Avon is now in the fourth month of its search for a CEO, someone who will have to stanch the exodus of sales representatives and the drop in sales in the United States, Brazil and Russia.
There are few other companies for whom buying Avon would make sense, analysts said.
"It's an opportunity that the board should seriously consider," said Sanford C. Bernstein & Co analyst Ali Dibadj. Except for perhaps another direct seller, he added, there are few potential suitors for Avon.
Coty's bid was not "dramatically too low," he said.
Morningstar analyst Lauren DeSanto said Avon's shares are worth $25 and "a premium to that fair value is warranted before Avon should consider an offer."
Coty said it had no plans to go hostile but took issue with Avon for being unwilling to talk.
"We do not understand how your Board's unwillingness to discuss our proposal can serve the best interests of Avon's shareholders," Coty Chairman Bart Becht said in a letter to be delivered to Jung on Monday.
Coty said it would be willing to raise its offer if Avon can show there is greater value in the company by opening its books.
Coty is confident it can line up the necessary financing to pull off the acquisition of a company with sales nearly three times greater than its own.
It said it would call the new company "Avon-Coty."
The fast-growing privately held company, majority-owned by Joh. A Benckiser GmbH, a German household and personal-care products company, is offering $23.25 per share -- a 20 percent premium over Avon's Friday closing price of $19.36 on the New York Stock Exchange.
At Friday's close, Avon's shares were down nearly 50 percent from a year and a half ago. Before Coty made its bid public, Avon was worth only about $8 billion, down from an all-time peak of $21.8 billion in June 2004.
Coty said it originally offered Avon $22.25 per share in early March, but failed to entice the company into talks.
Avon's shares rose 15 percent, or $3.10, to $22.45 in midday trading.
LESS PERFUME, MORE EMERGING MARKETS
For Coty, buying Avon would allow it to depend less on fragrances, which accounted for 57 percent of its $4.1 billion in sales in its year that ended in June 2011, and branch out more into cosmetics and skin-care products. The company praised Avon's presence in emerging markets, an area where it wants to grow.
Coty CEO Bernd Beetz told Reuters last year that acquisitions were central to its strategy of becoming a more diversified company.
Coty gets nearly 90 percent of its business from Europe and North America, and has so far largely missed out on China's ravenous demand for Western brands. Overall revenue was up 17 percent in the last fiscal year.
Coty also said Avon's door-to-door direct sales model would help its beauty brands.
In recent years, Coty has done deals aimed at becoming a more diversified beauty company. In 2010, it acquired Philosophy Inc, a maker of personal-care products, from Carlyle Group for $1 billion and bought a majority stake in Chinese skin-care company TJoy Holdings Ltd, which also has a distribution system and infrastructure to help Coty's other product lines.
In contrast, Avon's sales have plummeted in the last few years in China, where it got a direct selling license in 2006. Avon has been conducting an internal probe into whether it broke Foreign Corrupt Practices Act to get that license. The U.S. government announced its own investigation last year.
(Reporting by Phil Wahba in New York. Additional reporting by Mihir Dalal in Bangalore, and Nivedita Bhattacharjee in Chicago.; Editing by John Wallace and Maureen Bavdek)
