Cosmetics Giant Expected to Reject Bid : Amway Offers to Buy Avon for $2.1 Billion

Times Staff Writer

Amway Corp. on Wednesday offered to buy Avon Products, the 103-year-old giant cosmetics firm, for $2.1 billion in cash.

The deal would unite two companies that made their mark in business by selling door-to-door. Amway now also sells its household products by mail order, while Avon, long known for its "Avon Lady" direct sales force, is offering such fragrances as its Giorgio Beverly Hills and Parfums Stern lines through department stores.

Amway's bid came one week after the Ada, Mich., company and Minneapolis investor Irwin L. Jacobs disclosed that they had acquired 10.3% of New York-based Avon's stock and might make a bid for the concern. On Wednesday, however, Amway announced the buyout offer on its own and did not indicate whether Jacobs would participate in the proposed deal.

Avon Chairman James E. Preston last week rebuffed the initial overture, saying the company was not for sale. He reaffirmed that stance in a letter to Amway Wednesday responding to the takeover bid, but said Avon's board will meet its legal obligations to its shareholders by reviewing the buyout proposal.

Industry analysts predicted that Avon will reject the offer, at least initially, but added that the company has few defenses against a possible hostile takeover bid. Avon does not have enough cash to keep its stock out of Amway's control by buying large amounts of its own shares, said Bonita Austin, an analyst at the investment firm Wertheim Schroder.

Austin said Avon, saddled with about $1.1 billion in long-term debt, lacks the cash to engineer a management buyout or to buy back much of its stock.

Ultimately, Austin said, she believes that Avon "will just try to get a higher bid from Amway. "Avon doesn't have a lot of options."

Prospects for finding a "white knight" to acquire Avon are not very promising, Austin said. Ronald O. Perelman, a takeover artist who is Revlon Group's chief executive, might be interested, but there are no other serious prospective buyers, she said.

Even so, Avon's stock climbed $3.875 a share to close at $39.875 Wednesday on the New York Stock Exchange, apparently indicating that some investors believe that a bid higher than Amway's current $39-per-share offer will emerge.

Avon may rely on an existing defense, a provision that gives its shareholders the right to buy the company's stock at half price should another party accumulate more than 20% of the shares. Anticipating that a raider might challenge the legality of that provision, Avon on Monday asked a New York state court to declare that provision valid.

"A lot depends on the shareholders rights provision," said Eileen Gormley, an analyst at Thomson McKinnon Securities. "Avon may have to depend on that provision if it wants to remain independent."

Gormley and other analysts said the $39-a-share offer was a fair price. However, a suitor may have to offer $42 or $43 a share to get Avon's board to endorse an acquisition, she said.

On the other hand, Amway might have difficulty getting financiers to provide funding for any deal involving more than $41 a share, said Andrew Shore, an analyst at Shearson Lehman Hutton. Shore, who expects Avon to eventually accept an Amway offer, said Avon stock would be selling in the $20-to-$25 range if not for the speculation over the takeover bid.

Shore, noting that Avon had a 1988 loss of $404.5 million, said the cosmetic company's directors were already under some pressure from shareholders and thus are not likely to use a "poison pill" takeover defense.

"After disappointing earnings, they don't want to engage in a slash and burn policy of doing something to weaken the company to discourage Amway," he said.

Amway referred to the possibility of a poison pill in its buyout proposal. Amway said it "reserves the right to reduce the per-share price of its offer" if Avon redeems the stock or takes any other action to reduce the value of the company.

"After careful consideration," the proposal said, "we have concluded that our respective businesses are complementary and that a business combination would generate substantial benefits for both companies, their respective distributor organizations and their respective shareholders . . . . Our offer is, of course, subject to negotiation."

Noting the conditions for the offer, Avon spokesman John Cox said the proposal "is not a firm offer--it's conditional." Cox said Avon's board would meet soon to consider the offer.

Amway today is expected to file a document with Securities and Exchange Commission providing some details on how it would operate Avon.

Avon's 1.4-million-member independent sales force sells cosmetics, fragrances and small gift items for the home. The company had 1988 sales of $3.06 billion.

Amway's product list includes toiletries, cosmetics, soaps and home-care, health and fitness goods.

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