Coty, which had made a $10.7 billion offer to buy Avon Products (NYSE: AVP), withdrew its bid. It said the the Avon board had failed to react to its offer by a Monday deadline. Avon’s shares will collapse. It cannot show Wall St. it has a plan to improve its prospects. Coty will be back, perhaps with a lower bid.

Coty wrote to Avon’s board yesterday and said:

We received encouragement from many of your shareholders, research analysts and others in the financial community. Despite this support, your total lack of engagement with us leads us to believe that you remain reluctant to explore a friendly, negotiated combination on a reasonable timetable. Two months is enough. Consequently, as our deadline to begin discussions expired today, our proposal is withdrawn. It is time for Coty Inc. to move on and pursue other opportunities.

Coty went to a great deal of trouble to make the bid. It lined up partners, including Warren Buffett’s Berkshire Hathaway (NYSE: BRK-B), and debt from JP Morgan Securities. Its efforts involved large amounts of management time and Coty’s reputation with the financial world. All the work to reach a deal will not end yet. Avon is too compelling a target, and Coty has too much invested in a successful buyout.

Coty’s best leverage is that, though Avon’s shares raced from $18 to $24 immediately after its bid, those shares certainly will sell back to $18, and perhaps less, as investors despair about Avon’s troubles. These include SEC investigations, slowing sales and several failed restructurings.

Avon might make a case for a quick turn, buts its CEO, Sherilyn S. (Sheri) McCoy, formerly of Johnson & Johnson (NYSE: JNJ), has only just begun her job. The challenges she faces are so complex and the company’s culture so entrenched that bettering Avon’s prospects could take a number of quarters — if they can be bettered at all.

Avon’s board faces a shareholder revolt because of the Coty decision. The board will have to contend with institutional investors who wanted the Coty bid to improve their fortunes. Avon also may have to wrestle with more downgrades of its debt. Each day that passes, it is more a victim of its own long-term failure to find a formula similar to the one that made it a premier retailer for years.

Coty has the Avon board painted into a corner. Coty can afford to wait, but it will not have to wait for long. Avon’s shareholders will quietly beg it to come back. And that will be enough to prompt it to make another offer. Avon should hope the offer is as high as the last one.

Douglas A. McIntyre

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