Why Perelman Faces Life Without Makeup

The prize booty from Ronald O. Perelman's corporate-raiding days is Revlon Inc., the cosmetics giant he captured in a bruising 1985 takeover battle. Under the New York financier, Revlon has brought out a plethora of new products, purchased other cosmetics lines, and revived the old Revlon glamour through dazzling ads. Perelman plainly enjoys running the company, which provides about half of his empire's earnings. He gets involved in the most minute marketing decisions.

So why has he been looking for someone to buy his jewel--or at least parts of it? Procter & Gamble, L'Oreal, and Unilever are all known to be looking over the nation's No. 1 makeup maker, valued by analysts at around $3.3 billion.

Revlon is on the block because Perelman is facing tight times (table). Although estimates of his wealth a few years ago ranged as high as $6 billion, BUSINESS WEEK now values his holdings at a more modest $2.2 billion. The problem is his empire's anemic cash flow, depleted by his huge debt load of $3.8 billion. During the first nine months of 1990, according to BW's calculations, Perelman's holding company, MacAndrews & Forbes Holdings Inc., had a negative cash flow of $113 million. Salomon Brothers Inc. estimates that when the Christmas season's fourth quarter is included, cash flow will turn positive--but will only barely cover interest. Furthermore, the Treasury Dept. recently moved to curtail $170 million in annual tax breaks to First Gibraltar Bank, a troubled Texas savings and loan Perelman took over in 1988.

Perelman executives concede that operations, if they generate any cash flow at all, won't produce enough to handle hefty upcoming debt payments: $472 million in mid-1992 and almost $2 billion over the following four years. "We always expected we'd need to sell assets to pay debt," says his counsel, James T. Conroy. Howard Gittis, Perelman's chief lieutenant, adds that in leverage-leery, recession-ridden 1991, cleaning up the balance sheet only makes sense.

GLITZY. Few Wall Street analysts, though, expect Perelman to sell all of Revlon. They say he enjoys the glitzy, celebrity-filled world of Revlon too much to abandon it entirely. Yet he has already quietly unloaded some small pieces: Revlon's Paris office building for $60 million in December and its Germaine Monteil skin-care line for $40 million in January. The popular Max Factor and Almay brands might bring much more--$1.1 billion, says Salomon. But Revlon, or its pieces, will fetch less than it might have a few years ago. A slowdown in cosmetics demand has Salomon forecasting flat Revlon profits through 1992, around $165 million yearly.

Procter & Gamble Co., which is pushing aggressively into personal-care products, is the most likely candidate to buy Revlon assets, particularly overseas. Edwin L. Artzt, who headed P&G's international operations before his elevation to chairman, has made it no secret that he would like to expand the company's cosmetics interests beyond the largely U. S. business it picked up by buying Noxell Corp. in 1989. A likely target on the Cincinnati company's list: Max Factor Japan, a top-performing Revlon unit.

One problem: If P&G did want to pick up Revlon units at home, it would risk antitrust problems. According to industry consultant Allan Mottus, P&G's Cover Girl makeup controls 23% of the American market outside department stores, while the top three Revlon brands hold 21%.

Unilever, the Anglo-Dutch company, wouldn't face such constraints in the U. S. France's L'Oreal, the largest beauty company in the world, is the least likely to go after Revlon: It has products in every niche already and prefers to grow internally, not through outside purchase. None of

the potential buyers would comment.Because the first debt crunch is a year away, Perelman has the luxury of biding his time looking for the right buyer. Another option would be to divest some of his other holdings. Last summer, he sold 15% of the stock in his National Health Laboratories Inc., a thriving medical-testing company, and used the $170 million proceeds to pay down Revlon debt.

Yet Perelman will probably keep most of what he has. Some units, such as Coleman Co., which sells camping equipment, are only marginally profitable and would attract few buyers. Indeed, they've been subsidized with Revlon profits. He's also unlikely to sell his Andrews Group, an entertainment company and chronic money-loser that should turn around next year, when its top-rated TV show, The Wonder Years, enters the lucrative realm of syndication.

Gittis insists that Perelman's main interest these days isn't selling. "The question is what Mr. Perelman will buy next," he says--probably consumer-products companies. But for all of his still-robust wealth, the chances for another round of big-time dealmaking will depend on what he can get for what he owns now.

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