NEW YORK (Reuters Breakingviews) - On Wall Street, Revlon means more than a two-bit makeup company. A 1980s lawsuit involving the sale of the New York firm controlled by billionaire Ron Perelman ushered in the so-called “Revlon Rule,” a corporate finance case study for decades on the responsibilities of boards to shareholders. After narrowly avoiding bankruptcy last week, some 24 years on, the $500 million company is at a crossroads. Its last chapter likely ends with a deal of its own.
Perelman, who owns almost 90% of Revlon through MacAndrews & Forbes, took control of Revlon after his then-company Pantry Pride launched a hostile takeover. Revlon’s board tried to thwart his offer by finding a friendlier suitor. A Delaware court ruled that the company’s board was at the mercy of shareholders. In an all-cash, change-of-control transaction, boards must run a process designed to maximize shareholder value.
Rows between shareholders and other stakeholders have since taken on a life of their own. What’s ironic is that Revlon’s investors haven’t much benefitted from shareholder maximization. Battered by an industry overcome by influencers like Kylie Jenner, Revlon’s sales fell in both 2018 and 2019. Then Covid-19 hit. Masks kept people from applying Super Lustrous Lipstick while lockdowns hurt other beautifying habits. In the past three years Revlon’s equity value has fallen almost 60% while Estee Lauder more than doubled.
Revlon could trudge through a turnaround, but there’s no guarantee lockdowns and mandated mask-wearing eases up anytime soon. And Perelman’s presence hasn’t done much – Revlon’s equity is worth less than when he originally bought the company. The recent restructuring of bonds that contribute to more than $3.5 billion of debt is only a Band-Aid. But it may have lifted a hurdle to a sale.
With a scrubbed balance sheet, Revlon could shine itself up for an auction. Lauder might even be a buyer. The $93 billion company has less than $5 billion in debt, about 1.5 times Refinitiv’s estimated EBITDA for the year ended in June 2021. If it paid a 25% premium, it could make a return of 8%, assuming Revlon’s operating income returns to 2019 levels. Vector in cost cuts of just 5% of Revlon’s overhead expenses and the return doubles. That would be one way to put lipstick on a venerable pig.
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