Deals

Tara Lachapelle is a Bloomberg Gadfly columnist covering deals. She previously wrote an M&A column for Bloomberg News.

It's been about 30 years since billionaire Ron Perelman gained control of Revlon, a mostly disappointing stock paired with a mostly disappointing product line. Now he's putting the $1.5 billion makeup company back on the block.

Revlon Share Up for Grabs
Revlon was the No. 4 player in the North American color cosmetics market in 2014. A suitor could look to gain a foothold or more scale by acquiring Revlon.
Source: Bloomberg Intelligence, Euromonitor
*P&G has agreed to sell 43 of its beauty brands, including Covergirl, to Coty.

To consider selling now, after hanging onto this investment for so long, Perelman must not see bright days ahead. (He owns 78 percent of the shares.) This is also the guy that in November made this comment on Bloomberg Television with respect to the economy:

"I think we've got some real issues. I think for the next two years, we're looking at real softness." 

So on the one hand, it's a buyer beware situation. But on the other, Revlon may just be a somewhat neglected brand that needs a bit of a makeover, in which case there's an opportunity for acquirers that could take a new turnaround approach.

Lost Its Luster
The stock had a modest recovery run in the years following the U.S. recession, but fell 15 percent during the most recent 12-month period.
Source: Bloomberg

Revlon certainly isn't the only cosmetics company having a rough go of it -- just look at Avon. And as Revlon shares lost 30 percent in the six months through Jan. 14, L'Oreal's were also down 13 percent. At the same time -- and speaking as a consumer -- it doesn't seem like Revlon has tried all that hard as of late. 

Competition has also become fierce, and that may be largely because of Sephora -- though you might not think a drugstore makeup brand and a higher-end retailer would fight over the same customers.

Something at Sephora changed in the past few years. Its stores used to be a bit intimidating because of its layout and aggressive salespeople. It had an exclusive feel. The stores are more inviting now.

There's an interesting write-up on the Interbrand site about how its consultants worked with Sephora to transform it into a "cosmetics luxury supermarket," which is a pretty good description for it. The company is owned by Paris-based LVMH Moet Hennessy Louis Vuitton, whose own stock has risen less than 2 percent in the past year. The changes at Sephora revealed that perhaps some shoppers were avoiding the store experience more than the higher prices. (It has a pretty good rewards program and website now, too.)

Meanwhile, there are also cosmetics shopping sites such as Ulta and subscription services such as Birchbox, where you get to test out pricier products for just a few bucks a month. Competition like that didn't exist even a decade ago.

Of course, much of the country can't afford to spend upwards of $40 on foundation or buy jars of anti-aging lotion at $100 a pop, so the market for cheaper brands is still huge, which makes Revlon's struggles a bit puzzling. Its revenue has fallen 3 percent year over year, on average, during the past three quarters.

Beyond the increased competition, a big problem for Revlon might be its packaging. Its boxes and tubes feel outdated and uninviting. Even its "Age Defying" line has a boring old feel to it that depressingly signals you've officially exited youth. Contrast that with Covergirl, which Procter & Gamble agreed to sell to Coty last year and which has mastered fun, youthful packaging and commercials. All shoppers want to feel young, and this seems like a relatively easy fix that a new Revlon owner could explore.

You can pretty much rule out most financial buyers, though. Revlon's $1.85 billion of debt as of September already exceeds its current market value and is five times the amount of Ebitda it generated in the past 12 months, according to data compiled by Bloomberg. Private-equity firms can't work with that. 

But there may be strategic suitors drawn to its strong U.S. presence, Bloomberg Intelligence analysts Duncan Fox and Maja Rakic wrote Friday. As of 2014, Revlon had a nearly 7 percent market share in the North American color cosmetics category and about 3 percent of that market globally -- though both figures are down a bit from prior years, according to Euromonitor data. Paris-based L'Oreal, New York-based Estee Lauder and Coty (after its deal with P&G closes) are the top three.

Will Perelman find a buyer? Tough to say. But in the right hands, Revlon's challenges might not be insurmountable.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story:
Tara Lachapelle in New York at tlachapelle@bloomberg.net

To contact the editor responsible for this story:
Mark Gongloff at mgongloff1@bloomberg.net