In its offer, Coty said that it would raise substantial equity and debt to finance the purchase, which would be the largest U.S. deal of 2012 if completed. On Thursday, Avon Products shares surged when the parent company of Coty said it would sell $2 billion of Reckitt Benckiser shares to help fund the deal. On Thursday, Coty said that its equity financing for the deal will come from BOT Capital Partners and
(BRK.A - Get Report)
, while debt financing will come from
In reaction to Coty's initial unsolicited offer, Avon Products, the world's largest door-to-door cosmetics merchant, rejected the offer saying that it "substantially undervalues" the company, which is struggling amid management change, slowing profits and an internal bribery probe. The New York-based company also noted that Coty's highly conditional offer gave it little reason to enter formal takeover discussions or open its finances for a bid.
In Coty's initial offer, the maker of perfumes branded by Heidi Klum and Beyonce Knowles raised the possibility of a price increase if Avon were to enter friendly negotiations and its finances show a greater fundamental value of the company.
"On its face, Coty seems to have limited ability to materially increase its offer price but given a rumored IPO and equity and debt financing arranged through credible institutions, per the offer letter, we believe the likelihood of a deal at a higher price increases," noted Stifel Nicolaus analyst Mark Astrachan in reaction to the April 2 offer. Astrachan rated Avon Products shares a "hold" and expected that it would eventually friendlier negotiations because of its internal struggles and the absence of a competing offer from a strategic acquirer.
calculates a takeover of Avon Products is the largest player in the cosmetics space since a $57.3 billion by
Procter & Gamble
"Coty noted the opportunity of distributing Coty's brands via Avon's distribution channel and that a material part of cost synergies would be reinvested into the combined business if the deal were to go through," wrote Bank of America Merrill Lynch analyst Christopher Ferrara in April. Ferrara suspended his rating on Avon Products in light of Coty's bid.
New York- based Avon Products shares fell amid an internal bribery probe stemming from its business in China and management change. In March, the company fired of its China-based executives, according to a regulatory filing.
In May, Fitch Ratings and Standard & Poors downgraded Avon Product's credit rating into near junk status citing weaker than expected earnings and questions on how quickly a turnaround can be executed.
Still, after Coty's bid was disclosed, some analysts said that with new management, Avon Products could recover from its waning sales and cash flow, in addition to management change and lingering corruption investigations. "While Avon clearly has [long-term] trouble spots like the U.S., we believe evidence suggests that its most critical issues are within its control and therefore likely could be corrected," noted Ferrara of Bank of America in an April 5 note detailing a contrarian argument to Coty's bid. Shortly thereafter, Avon hired McCoy of Johnson & Johnson as its new CEO.
For more on Coty's bid for Avon Products, see
5 ways to play Avon Products options
-- Written by Antoine Gara in New York