Coty Answers the Door to Avon and Wants to Buy the Whole Company

It was revealed on Monday that Coty has made an unsolicited offer to buy Avon Products (NYSE: AVP), the door-to-door cosmetics seller that is something of a national treasure.

According to Bloomberg, AVP may be tempted as it is currently the subject of a bribery probe, and the deal is valued at $10 billion.

The figures see a cash proposal of $23.25 per share, which is 20% higher than AVP's closing price on March 30. Coty is obviously taking the potential deal extremely seriously, and it has said that it has held “extensive discussions” about financing the deal.

No matter how you look at it though, it is a bold and ambitious move by Coty, a company that is attempting to purchase a company with double its own sales. For its part, Avon wants to replace underachieving CEO Andrea Jung due to slow sales and the fact that internal probes saw a 40% drop in shares in 2011.

Coty saus that it does not want to purchase Avon on a hostile basis, but the market seems to like the idea because AVP rose 25% to $24.25 on Monday morning.

On March 18, Citi published a research report stating that AVP generated free cash flow of $379 million in 2011, which represents a 6% increase as compared to the $358 million in free cash flow generated in 2010. The improvement in FCF comes despite a 5% drop in operating cash flow as cap expenditures were lower by 16%.

“Based on our calculation, AVP's 4Q11 cash conversion cycle increased by 3 days (which represents a sequential improvement compared to the 11-day deterioration that we saw in 3Q11), owing to higher average inventories (+3 days) as average receivables and average payables were essentially unchanged in the period.”

Citi also said that AVP invested $268 million in 2011, which is roughly one-fourth of the $1.1 billion invested in 2010. This decrease can largely be explained by acquisitions of Silpada and Liz Earle in 2010, and to a lesser extent a decline in capital expenditures. In 2012, AVP expects to spend $260-$290 million in capital expenditures, sourced from cash flow from operations.

“AVP used $285 million for financing activities in 2011, as compared to the $235 million generated from financing activities in 2010. With AVP's dividend payments up only modestly YoY and the company having been essentially inactive with their share repurchase program in 2011, the change can be attributed to AVP's net $605 million issuance of debt in 2010 (used in part to finance a portion of the Silpada acquisition).”