Consumer

Shelly Banjo is a Bloomberg Gadfly columnist covering retail and consumer goods. She previously was a reporter at Quartz and the Wall Street Journal.

When a company's shares sink after introducing a new CEO, that usually means there's more to the story. 

On Monday, Revlon announced a new chief executive, who cheerily pledged to bring "renewed growth" to the global cosmetics giant that has lagged competitors for years. Shareholders weren't so thrilled, through, sending the stock down as much as 13 percent at one point. (Shares ended the day down about 3 percent.) 

Beauty Is In The Eye of The Beholder
Revlon's shares surged after saying it would explore a sale but fell after appointing a new CEO
Source: Bloomberg

The disappointment stems from the company's earlier disclosure to explore options such as selling itself after decades of being controlled by billionaire Ronald Perelman. When shareholders didn't get a buyout announcement, news of a new CEO zapped investor hopes another firm would buy the company outright and give it a much-needed makeover, at least any time soon.

Instead, appointing a new CEO could accompany a renewed attempt by Perelman -- who won Revlon in a 1985 hostile takeover battle -- to buy the 22 percent of the company he doesn't already own and take it private. 

If Perelman makes a bid for Revlon at, say, $50 a share -- a 30 percent premium to its 6-month high -- then he'd only have to shell out about $590 million to own the company outright. And he could do that without spending a penny of his own by using a mix of cash and debt, estimates Arthur Roulac, partner at investment firm Three Court, a Revlon shareholder. Roulac notes Revlon has around $300 million in cash and manageable debt levels -- Revlon's net debt to Ebitda ratio is around 4.7. The $290 million in additional debt needed to finance the deal would bring Revlon's net debt to Ebitda to around 5.4, roughly equivalent to the leverage levels the company had when it bought the Colomer Group in 2013. 

Room To Borrow
Revlon has brought down its debt to more manageable levels over the past two years
Source: Bloomberg

Revlon's enterprise value is nearly 11 times Ebitda, compared to the 16.7 times Ebitda that Coty paid for Procter & Gamble's cosmetics business before synergies. And Revlon's sales results have actually been improving lately. Taking Revlon private on the cheap gives Perelman a few more years to make over the company in order to sell it to a big consumer products company such as Henkel, L'Oreal, or Shiseido and take home all of the winnings himself, rather than sharing them with Revlon's other current shareholders. 

Growing Pains
Revlon's annual adjusted revenue
Source: Bloomberg

It's a familiar ploy for anyone who has followed Perelman's investing playbook. Back in 2009, Perelman tried unsuccessfully to take Revlon private. Four years later, Revlon entered into an $850,000 settlement with the Securities and Exchange Commission following accusations it hid information from independent directors and misled shareholders. The company did not admit or deny wrongdoing.

In 2011, Perelman and other board members of MacAndrews & Forbes Holdings were sued by investors over a deal to take his M&F Worldwide holding company private -- though in that case, the judge ended up ruling in their favor, concluding that they didn't mistreat investors.

This time around, Perelman at least looks like he is entertaining other buyout offers. The company disclosed in January it was exploring "strategic alternatives," an indication investors took to mean the company was shopping itself around to appease shareholders, who expect to get the best price from any sale; shares jumped 12 percent in the months following that announcement.

Shrinking Company
Revlon's market cap has shrunk due to lagging performance and selling units such as eye care and lab services.
Source: Bloomberg

But if Perelman were really serious about selling Revlon to a strategic suitor any time soon, then we should have heard more by now about hiring bankers, setting up some sort of public auction, or hiring an interim CEO who could man the ship as the company explores a sale. And while that could still occur, it sure seems like he's trying again to make a deal happen that has already failed once.

Correction: Revlon entered into an $850,000 settlement with the Securities and Exchange Commission in 2013 following accusations it hid information from independent directors and misled shareholders. An earlier version of this story incorrectly said Perelman entered into an $850 million settlement with the SEC. 

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

To contact the author of this story:
Shelly Banjo in New York at sbanjo@bloomberg.net

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