Jan. 18 (Bloomberg) -- A takeover to secure the rights to sell Paris Hilton’s scent in a bottle is giving traders a chance to triple their money betting on the industry’s most expensive acquisition.
Parlux Fragrances Inc., which makes perfumes named after celebrities including Hilton and pop-music singer Rihanna, ended yesterday 76 cents below its offer from Perfumania Holdings Inc. While Perfumania has slumped since agreeing to pay more than double Parlux’s market value in the costliest cosmetics deal relative to earnings, traders can reap an annualized return of as much as 218 percent buying Parlux shares if the company produces enough cash as a condition of the deal when it reports earnings next month, according to data compiled by Bloomberg.
The acquisition would give Perfumania, which operates more than 300 perfume shops across the U.S., control of its largest supplier, helping it lower costs and bolster revenue that fell by the most in almost a decade last year. With Parlux retreating 11 percent from its peak after the agreement was announced in December, Tullett Prebon Plc says the potential reward for arbitragers may now make betting on the takeover worth the risk.
“It’s an attractive spread,” Sachin Shah, a Jersey City, New Jersey-based merger arbitrage strategist at Tullett Prebon, said in a telephone interview. “The bottom line here is that if Parlux is able to meet that cash requirement threshold, then the deal should close. They should be in a fairly easy position” to generate that cash, he said.
Today, Parlux advanced 1.1 percent to $5.36 a share and climbed to within 70 cents of Perfumania’s offer, the narrowest gap since the takeover was announced.
Raymond Balsys, chief financial officer at Fort Lauderdale, Florida-based Parlux, didn’t immediately return a telephone call or e-mail seeking comment. A representative for Bellport, New York-based Perfumania declined to comment.
Perfumania sells everything from perfumes to Bed Head shampoo and Kabuki makeup brushes in its outlets nationwide and on its website. By acquiring Parlux, Perfumania would gain the company that makes branded fragrances such as Just Me by Paris Hilton, the 30-year-old hotel heiress and socialite, Rihanna’s Reb’l Fleur and singer Jessica Simpson’s Fancy Love.
In December, Perfumania agreed to acquire Parlux for $4 a share in cash and 0.2 of its own stock for each Parlux share held, or about $175 million after accounting for debt and cash, data compiled by Bloomberg show. Parlux shareholders can also opt to receive 0.53333 Perfumania shares in lieu of cash.
Smell of Money
The terms of the deal are contingent upon Parlux having at least $15 million in cash and equivalents, according to Tullett Prebon’s Shah. If Parlux doesn’t have enough money when it reports earnings in February, the amount of cash that Perfumania is offering may decrease, he said.
After surging 71 percent on Dec. 27, Parlux has retreated as Perfumania lost almost half its value. Parlux ended at $5.30 a share yesterday, versus the cash-and-stock offer of $6.06.
Parlux has languished below the deal price because investors are concerned it may not be able to come up with the money needed under the current terms, according to John Dorfman, chairman of Boston-based investment firm Thunderstorm Capital. The price that Perfumania agreed to pay also made some traders less confident the deal will be completed, he said. Dorfman doesn’t own shares of either company.
At 42 times Parlux’s earnings before interest, taxes, depreciation and amortization, the takeover is the most expensive for any acquisition in the cosmetics and toiletries industry greater than $100 million. The 140 percent premium is also the industry’s richest since 1999, the data show.
The transaction, valued at about $131 million yesterday, is now greater than Perfumania’s own market capitalization of $92.4 million, according to data compiled by Bloomberg.
Parlux is trading at “a considerable discount, so clearly the arbitrage community thinks there’s a real risk that the deal won’t get done,” Dorfman said in a telephone interview. “Arbitragers are handicapping the cash provision by how much of a discount to the offer they’re giving.”
Parlux had $12.1 million in cash and near-cash items as of Sept. 30, meaning it needed to boost reserves by $2.9 million last quarter to satisfy the terms of the takeover. In its fiscal third-quarter ended December 2010, Parlux increased its cash position by $6 million, or double the amount required, data compiled by Bloomberg show. In the same period two years ago, the company’s reserves grew by more than $5 million.
With Parlux set to report its quarterly earnings in the week ending Feb. 10, according to Tullett Prebon’s Shah, arbitragers betting on the stock now can reap a profit of as much as 218 percent on an annualized basis if Parlux says by that date that it has enough cash, the data show.
If traders held onto the shares until the end of June, when the deal is projected to close, the annualized gain would be 32 percent. That’s still be the biggest for any U.S. deal with a completion date after February, data compiled by Bloomberg show.
“In my experience in doing these types of deals, the target company rarely, if ever, signs a deal when they’re not confident that they will have the required amount of money,” Steve Gerbel, founder and president of Chicago Capital Management, a Chicago-based hedge fund that focuses on merger arbitrage, said in a telephone interview. The deal “could be attractive” versus the risk, he said.
To contact the reporter on this story: Tara Lachapelle in New York at email@example.com.