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Avon products are seen at St. John's University in New York in this April 18, 2009 file photo.


Coty Inc. needs another dash of powder to win over Avon Products Inc. shareholders with its $10-billion (U.S.) bid. But thanks to years of flawed stewardship by the iconic American cosmetics company's board and management, attracting Avon's shareholders shouldn't be impossible for the privately held maker of Playboy and Chupa Chups fragrances. It just needs to be more creative to seal the deal.

Avon has two basic, if big, challenges. Its business model, whereby Avon ladies hawk makeup door-to-door, has faltered despite obvious advantages in penetrating emerging markets. Compounding the problem, rather than kicking out its long-time chief executive Andrea Jung, Avon's compliant board appointed her chairman in December. That's not just bad governance, it has hurt the business of recruiting Ms. Jung's replacement.

Coty's offer is clearly opportunistic. The company chaired by former Reckitt Benckiser boss Bart Becht had been wooing Avon behind the scenes to no avail. Its $23.25 a share offer puts Avon's hapless directors further on their back heels. The trouble is that even with a 20 per cent premium, Coty's offer comes at a 30 per cent discount to the stock price less than a year ago. Even hot-money investors won't find that a compelling prospect.

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There's a way to square the circle, however. Coty is lining up potential equity financing for the deal from Warren Buffett's favourite banker, Byron Trott, alongside debt financing from JPMorgan. Why not restructure the deal to provide Avon shareholders with some of the upside to be created by merging the two companies under a proven management team?

Mr. Becht recently left household and personal care giant Reckitt, whose primary shareholder, the Benckiser family, is also Coty's. While there, he restructured a humdrum business once best known for its mustard, improved margins and completed a handful of takeovers to create economies of scale. It worked. Under his leadership Reckitt's market value soared from $7-billion to some $40-billion today.

True, engineering a reverse takeover that effectively takes Coty public and puts its management in charge wouldn't be simple. But absent plunking down a far bigger chunk of change, it may be the only way to break the unprofitable tyranny of Avon's board over the company's shareholders.

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