Perelman Prompts Speculation Lowest Bid Gets Biggest Price Rise: Real M&A

Ron Perelman is trying to complete the least expensive buyout of a holding company in eight years, prompting speculation that traders can extract the biggest price increase of any U.S. deal from the billionaire.

Perelman, who owns 43 percent of M&F Worldwide Corp. (MFW) and is its chairman, offered to acquire the rest of the company three days after it fell to a two-year low in June. The $24-a-share bid was 4.1 percent less than the average price in the past year for New York-based M&F, which makes everything from licorice to checkbooks and standardized test forms. M&F has climbed 6.7 percent above Perelman’s proposal, more than any U.S. all-cash acquisition, according to data compiled by Bloomberg.

While the buyout is 42 percent above M&F’s price a day before the deal was announced, shareholders want a higher offer for a target that throws off more free cash relative to its shares than any U.S. holding company worth at least $100 million. Perelman, whose hostile takeover of cosmetics maker Revlon Inc. (REV) in the 1980s helped build his fortune and led to a ruling that made price the biggest consideration in acquisitions, may now try to gain control of M&F on the cheap, according to the University of Chicago’s Steven Kaplan.

Photographer: Mark Elias/Bloomberg

M&F Worldwide Corp. chairman Ronald Perelman. Close

M&F Worldwide Corp. chairman Ronald Perelman.

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Photographer: Mark Elias/Bloomberg

M&F Worldwide Corp. chairman Ronald Perelman.

“It is ironic given his history” with Revlon, said Kaplan, a finance professor at the University of Chicago’s Booth School of Business. “I would predict that he will raise the price and that seems to be what the market is betting on.”

Licorice, Checkbooks

Perelman declined to comment, as did Christine Taylor, a spokeswoman for M&F Worldwide.

M&F owns Mafco Worldwide Corp., a licorice producer; Harland Clarke Corp., which makes checks; and Scantron Corp., which provides testing systems to educational institutions.

MacAndrews & Forbes Holdings Inc., the New York-based company that Perelman uses to make acquisitions, offered M&F about $264 million for the 57 percent it doesn’t already own on June 13, according to data compiled by Bloomberg.

Including M&F’s $2.04 billion in net debt, the transaction is worth about $2.3 billion, the data show.

Since the proposal was announced last month, M&F has recouped of all its losses, which reached 27 percent this year. After closing at $16.96 on June l0, the stock has since rallied 51 percent to $25.61 yesterday. That’s $1.61 more than Perelman’s all-cash offer, indicating that arbitragers expect a higher bid will emerge, the data show.

‘Lowball Bid’

While Perelman’s $24-a-share proposal sparked M&F’s biggest one-day advance since at least 1995, the company had traded at an average of $25.03 in the year prior to the announcement, according to data compiled by Bloomberg.

Perelman’s offer values M&F at 5.2 times earnings of $477 million before interest, taxes, depreciation and amortization in the past 12 months, the data show. That’s the lowest among comparable U.S. companies, which trade at a median of 8.9 times. It’s also the least expensive for a takeover of a holding company since November 2002, data compiled by Bloomberg show.

“He was able to offer a premium and still bid only $24,” said John Dorfman, chairman of Thunderstorm Capital in Boston. “That’s a lowball bid. He would be getting a great deal if it goes through, but the rest of the shareholders would be getting a bad deal.”

Dorfman estimated that a “fair offer” based on the company’s net assets would equal about $34 a share, or 42 percent more than Perelman’s bid.

By pursuing M&F, Perelman can also gain control of a company that’s cheaper relative to its free cash flow and sales than any other U.S. diversified holding company with a market value greater than $100 million, the data show.

Revlon Rule

M&F’s businesses last year generated more than $250 million in cash from operations, after taking into account capital expenses, the most since at least 1995, the data show. Its free cash flow yield of about 46 percent is the highest among its competitors, which have a median yield of 5.3 percent.

“The public markets don’t think it is worth very much,” said Adam Pritchard, a corporate and securities law professor at the University of Michigan Law School in Ann Arbor. For Perelman, “that’s a good reason to take the company private,” he said.

Perelman is known for his hostile bid for New York-based Revlon using cash raised by former junk bond salesman Michael Milken. The bidding contest for Revlon between Perelman’s Pantry Pride and Forstmann Little & Co. ended in a legal case that produced the framework for the so-called Revlon Rule.

The precedent mandates that once it is clear that a company will be sold, its directors have the fiduciary duty to find the highest price for shareholders. The ruling blocked Revlon’s agreement with Forstmann Little in favor of Perelman.

Pocket Money

“If the M&F board decides to put up the ‘for sale’ sign, then it has to be guided by Revlon,” Roy Smith, a finance professor at New York University’s Stern School of Business, said in an e-mail message.

M&F will “appoint a special committee of independent directors to consider its proposal and make a recommendation to the company’s board,” MacAndrews & Forbes said in a statement on June 13. If the committee doesn’t recommend the offer or shareholders reject the bid, MacAndrews & Forbes intends to remain a long-term investor, it said.

While traders are betting that M&F is worth more than Perelman’s proposal, other bidders aren’t likely to emerge because Perelman already controls almost half of the company and could walk away, said Sachin Shah, a former merger arbitrage strategist for Capstone Global Markets LLC in New York.

That may limit how much more M&F shareholders can wrest from Perelman if he decides to raise his offer, he said.

“Perelman is trying to take the company on the cheap while the company’s stock collapsed,” said Shah. “It’s not likely that you will see a white knight. A company like this to Ron Perelman is money in his pocket.”

To contact the reporters on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net; Danielle Kucera in New York at dkucera6@bloomberg.net.

To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net.

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