Perelman Roils Revlon Stock and Debt With Share-Buying Spree

(Bloomberg) -- Normally investors might cheer if they heard about heavy insider purchases by a billionaire like Ron Perelman. At Revlon Inc., it has some of them worried.

Perelman, the chairman and biggest shareholder of the struggling beauty company, has bought shares 33 times in the open market since May, sending the stock surging and sparking speculation that he may take Revlon private.

Among those who aren’t thrilled is Chris Mittleman, chief investment officer of Mittleman Brothers LLC. His firm, Revlon’s second-largest shareholder, told Revlon’s board in an August letter that Perelman’s purchases could be a “creeping tender offer” and an “existential threat” that will squeeze out and shortchange public holders. Some of the company’s unsecured bonds, which could be hurt most by a debt-fueled buyout, have slid to less than 80 percent of their original value.

Perelman’s investment firm, MacAndrews & Forbes Inc., has said it isn’t planning any such action, but the promise is good for only a year. That’s too short for Mittleman, 49, who’s concerned that a buyout might come before the benefits of a turnaround show up in earnings and the stock price.

Instead of being rewarded for waiting, investors could wind up missing “most of the payback, if we are bought out in mid-2018 at an unfairly low price,” Mittleman said in emailed comments to Bloomberg. “Obviously we would push back against any such low-ball deal were it to be offered, using any and all means legally available to us.”

In another letter sent to Revlon’s board Thursday, Mittleman said he’ll consider seeking injunctive relief in Delaware Chancery Court until a poison pill or a standstill agreement is in place.

Perelman gained control of Revlon through a hostile takeover in 1985 using cash raised with the help of former junk-bond chief Michael Milken. He sought to take the cosmetics maker private in 2009, prompting a lawsuit from other investors that he agreed to settle. Perelman, the 74-year-old chairman of the board, now controls an 85 percent stake in the company, whose debt is still junk-rated. Representatives for Revlon and Perelman declined to comment.

It isn’t the first time Perelman’s actions prompted market speculation. A year ago, MacAndrews said it was exploring “strategic alternatives” for Revlon. Two months later, it said Fabian Garcia, a Colgate-Palmolive Co. veteran, would become chief executive. Three months after that, Revlon said it was buying money-loser Elizabeth Arden Inc. for $419 million. That helped boost Revlon’s debt to $2.8 billion, which costs about $140 million a year in interest.

A turnaround for those mature brands won’t come cheap. Shoppers are shunning department stores like Macy’s Inc. and drug stores where the combined company sells many of its products, heading instead for e-tailers and specialty retailers such as Ulta Beauty Inc. More costs will come from Revlon’s relaunch of another old brand, Almay. By contrast, rival Estee Lauder Cos. bought younger, independent names that millennials favor.

“These brands have a very high degree of recognition, but depreciating levels of relevance,” said Stephanie Wissink, an analyst at Jefferies LLC.

Garcia has vowed to revive sales and make Revlon a top 10 global beauty brand. Revlon has stepped up social-media marketing, tapped beauty influencers, partnered with Amazon.com Inc. and increased distribution at Ulta.

Losses Mount

Revlon reported a loss of 72 cents a share in the first quarter, sending the stock down 24 percent, and another loss in the second quarter. The shares rallied as Perelman, with a fortune of about $18 billion, stepped up his purchases starting May 8, but they’re still down 25 percent this year. The stock dropped 3.5 percent Thursday, the biggest loss in more than a week.

There are more pessimists, with the number of shares being shorted -- a bet that the stock will fall -- reaching 44.4 percent of the publicly held shares as of Sept. 29. That’s up from 35.3 percent two weeks earlier.

Revlon’s bonds have fared only a little better. Its 5.75 percent notes due 2021, which trade at less than 87 cents on the dollar, have returned minus 9.7 percent this year, and holders of the 6.25 percent notes due 2024 are down more than 20 percent. Those were quoted at 75.38 cents on the dollar in New York, according to Trace, the bond-price reporting system.

With leverage at 7.6 times earnings before interest, tax, depreciation and amortization, Revlon drew downgrades from Moody’s Investors Service and S&P Global Ratings in July that left it five steps into junk territory. S&P predicted leverage will rise to about 8 times by the end of fiscal 2017, and while liquidity is adequate, Estee Lauder, L’Oreal SA and Coty Inc. have more financial firepower to compete for customers.

The troubles make Revlon less attractive to potential outside buyers, said Jenna Giannelli, a credit analyst at Citigroup Global Markets.

Perelman hasn’t made open-market purchases since 2008. While the motive for his recent buying isn’t clear, it’s not unusual for Perelman to buy if he feels a stock is undervalued, said Noel Hebert, a Bloomberg Intelligence credit analyst.

Closing In

That’s no comfort to Mittleman, whose firm has been investing in Revlon for almost seven years. MacAndrews’s holding is 5 percent away from reaching the 90 percent threshold which would allow a so-called short-form merger under Delaware law, giving Perelman the right to go private without shareholder approval.

Mittleman says that’s unfair, and he’s called for a standstill agreement for five years so he isn’t squeezed out. With the stock at $22.70, Mittleman pegs the fair value at $43 to $50 today, and more as the turnaround takes hold.

Not all investors share Mittleman’s concern, including bondholders. Jim Russo, chief investment strategist at Altrius Capital Management, has held Revlon’s debt for more than a decade and said that Perelman’s presence can have a positive influence in turning the company around. Since Perelman has such a vested interest in Revlon’s success, Russo and Thrivent Financial’s Paul Ocenasek aren’t worried about a debt-fueled buyout, especially with the remaining stock in public hands only worth about $178 million.

“You can’t really lever the company any more, given how much debt is already on it,” said Ocenasek, who holds Revlon’s 2021 notes. “We’re more concerned about the company itself rather than whether Perelman owns 100 percent.”

--With assistance from Matt Turner and Brandon Bell

To contact the reporters on this story: Stephanie Wong in New York at swong139@bloomberg.net, Molly Smith in New York at msmith604@bloomberg.net.

To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net, Nikolaj Gammeltoft at ngammeltoft@bloomberg.net, Rick Green, Lisa Wolfson