Coty/Avon: a thing of beauty One company offers to buy another, offering a modest premium and explicitly leaving the door open to a better price. The target bats the offer away as inadequate. So shares of the target surge past the initial offer? Not in the case of fragrance maker Coty's bid for Avon Products. On Monday, the morning of Coty's $23.25 bid, a 20 per cent premium to the previous close, Avon's shares traded as low as $22. The bid values them at 8.5 times forward earnings before interest, taxes, depreciation, and amortisation - middling for a beauty company. And the stock traded over $30 within the last year. So why are shareholders not expecting more? Admittedly, the Coty offer has weaknesses. Avon has an operational restructuring, a chief executive search and two serious investigations (one concerning bribery in emerging markets and the other into contacts with analysts) all unfolding at once. Such a company will be sceptical about any bid, especially when the bidder is explicitly uninterested in going hostile. But there is much about the offer that makes sense. For Coty, Avon offers needed distribution in the emerging world. Ownership by a private company also helps Avon, which could get its house in order without constantly answering to investors, and which pays a dividend that consumes more than 100 per cent of its free cash flow. Perhaps shareholders have concluded that, given Avon's troubles, it is simply unrealistic to hope for a better offer. Avon has been in restructuring mode for half a decade, but sales have grown by an average of 2 per cent annually over the past three years and margins are falling. The investigations are serious. Yet the board shows no willingness to talk. This position is wrong. Cody's bid may be a bit odd. But it is a fifth above where the shares were last week. Avon is in no position to turn up its nose.