With the help of Warren Buffett's Berkshire Hathaway Inc (BRKa.N), fragrance maker Coty raised its bid for Avon by 6.5 percent to $10.65 billion and set a four-day deadline for the cosmetics company to start talks.
That leaves the Avon board and Sheri McCoy with a big decision to make just two weeks into her job as chief executive of Avon Products Inc (AVP.N). The board previously rejected Coty's offer on the grounds that a turnaround under a new CEO would be more valuable than a buyout.
The board did not reject the new bid, saying only that it would consider it in due course.
Coty, maker of Stetson aftershave and Beyoncé fragrances, first publicly offered to buy Avon, which has three times its revenue, for $23.25 per share in April. Avon shares rose as high as $23.57 in mid-April.
Avon shares closed 3.3 percent lower at $20.89 on Thursday -- about 15.6 percent below the latest offer of $24.75 per share -- indicating that investors were not betting on a deal.
"I don't think they will (take up the offer). They know that the current bid is too cheap," said Michael Bigger, founder of trading firm Bigger Capital, which holds Avon shares. "Cosmetics is a great business. It deserves a premium. If I were them, I would ask for $28 or more."
Privately held Coty also repeated in a letter to Avon's board, dated May 9, that it would not go hostile.
Avon's stance thus far has left some shareholders disappointed. John Lamie, an Avon shareholder who worked in the company's product development in the 1970s and would be willing to sell his shares for $28, said, "I think they have a responsibility to talk."
Avon, the world's largest direct seller of cosmetics, could see its shares sink if it ignores Coty.
"Absent a takeout, (Avon) shares are likely to return to high-teens levels," Stifel Nicolaus analyst Mark Astrachan wrote in a research note.
In the letter, Coty Chairman Bart Becht said equity financing sources include Coty's main shareholder, Joh. A. Benckiser, BDT Capital Partners and some of its limited partners, and Berkshire Hathaway. Coty said J.P. Morgan Securities would provide debt financing.
Berkshire Hathaway would provide $2.5 billion of the financing, according to a person familiar with the matter.
"Coty can't wait around for too long. They have to get on with their business," said Sanford C. Bernstein analyst Ali Dibadj. "The risk is that the deadline is very short."
MORE DETAILED FINANCING
While Coty has previously said it had strong sources for its financing, Thursday was the first time Berkshire was mentioned by name. BDT Capital Partners, founded by former Goldman Sachs Group Inc (GS.N) partner and long-time Buffett confidant Byron Trott, and privately held Joh. A. Benckiser have been known since the beginning.
It appears other financing, from Coty's main shareholder, was also recently lined up. On Wednesday the Reimann family's JAB Holdings BV, which is also Reckitt Benckiser's (RB.L) biggest shareholder, said it intended to sell about 4.9 percent of its stake in British consumer goods group Reckitt to reduce its total holding to 10.4 percent. One reason given was to invest in new opportunities.
Fitch put Avon on a negative ratings watch, pending the outcome of talks between Avon and Coty. Avon's senior unsecured debt is currently rated BBB-, with a stable outlook. Fitch pointed out that Coty has said before that it wants to keep a combined company at investment grade. It also noted that Berkshire has a history of supporting investment-grade companies and typically is not involved in leveraged transactions.
Moody's Investors Service said in a statement on Thursday afternoon that it was lowering its long-term ratings on Avon to Baa1 from A3.
McCoy, a former Johnson & Johnson executive, joined Avon as its CEO on April 23, replacing Andrea Jung, who had held the job for 12 years.
McCoy told investors in her first public comments as CEO last week that her priority was to stabilize Avon's business ahead of an in-depth review.
Coty said on Thursday it was willing to raise its bid further, provided it was given access to Avon's financial records and then decided a higher offer was warranted.
It repeated that before it could raise the offer any higher, it needs to understand the financial implications of the U.S. probe into whether Avon broke antibribery laws to win licenses overseas.
Coty also said it needs a closer look at Avon's business to get a sense of potential savings from combining the businesses and to see how it can make selling Avon more lucrative for its representatives.
Such due diligence would take "a few weeks," Becht said in the letter.
Last week, Avon reported weak first-quarter results, including a sharp drop in profit.
Avon has said it will conduct a thorough business review this year, but Coty said in its letter it could not give Avon all that time.
"We continue to believe that our proposal would provide compelling value to Avon's shareholders relative to a difficult and uncertain multi-year turnaround on a stand-alone basis," Becht said in the letter to Avon's board.
The companies first met to informally discuss a tie-up in February, initially exploring having Avon buy Coty. Becht last month said that when no offer came from Avon, Coty made a verbal offer, followed by three letters in March.
(Additional reporting Michael Erman in New York and Nivedita Bhattacharjee in Chicago. Editing by Maureen Bavdek, Matthew Lewis, Douglas Royalty and Steve Orlofsky)