The following segment is taken from this fund letter.
Revlon (NYSE: REV)
The MIM has already communicated concerning the Revlon filing for bankruptcy on June 15. look at this link if you missed it, because MIM’s opinion here is unchanged.
Revlon has since rising from the pre-bankruptcy deposit low of $1.08 on June 13 to above $9.00 a few times, on June 22 and again on August 1, and in both of those sessions trading, MIM sold a good chunk of his position at just over $9.00/share, given that the discounted estimate of Chris’ fair value is $10 (down from the mid-20s ).
If the bankruptcy process results in an auction of the assets, the realization could be well over $10 per share simply by applying the range of current market multiples. But bankruptcy introduces significant costs, uncertainties and risks that could compromise equity, so it makes sense to reduce the weighting of these periodic price spikes.
MIM continues to believe that there are plenty of buyers for these assets who could easily afford the 2x sales and 14x EBITDA required (according to Chris’s calculations) for equity to recoup around $10 per share in value. 15x EBITDA would be nearly $16 per share. 16x would be $22. And there are also unexpected new potential buyers.
For example, on a July 27 earnings conference call, luxury fashion giant Kering SA (OTCPK:PPRUF) said it was considering entering the beauty business directly for the first time. . They currently operate under a licensing model, with Coty Inc. (COTY) managing Gucci, Alexander McQueen and Bottega Veneta; and L’Oréal holding the rights to Saint Laurent, and Interparfums in charge of Boucheron.
Since Kering focuses exclusively on prestige brands, they would probably only be interested in the Revlon-owned Elizabeth Arden business. But, they could pay dearly for it and it would still be very accretive for Kering given the significant cost and revenue synergies one could easily imagine there.
Either way, if MIM’s base case scenario is realized and realized as an asset sale (and not a common stock buyback which would likely destroy tax assets), it would leave REV around $500 million. dollars in cash (about $10 per share), and over $1 billion in NOL. Ironically, Revlon started this way, a former bankrupt public holding company, Pantry Pride (was a chain of supermarkets), with cash and a huge NOL, which Perelman took over and used to buy Revlon in 1985.
If there’s an argument to be made against the retention value of Revlon’s existing equity, MIM thinks it has to start with how 2x sales and 14x EBITDA is kind of an unreasonable expectation for those assets. Given that such a valuation would be extremely accretive for nearly every strategic buyer imaginable, especially post-synergies, MIM thinks this is a reasonable expectation.
This is a unique opportunity for any buyer to make a significant leap in terms of market share, distribution and onshore manufacturing capacity, so there is strategic value here beyond the normal capitalization of cash flow.
Estee Lauder (EL) is doing incredibly well in prestige cosmetics, but they don’t have mainstream brands (L’Oreal has both) and in 2008 Estee Lauder saw sales drop 11.6% while that Revlon only experienced a 1.5% drop in sales as consumer brands. held up better in difficult times.
Chris owned Maybelline in 1994-95 around $17 when it was down (from $40+) and out of favor, just before L’Oreal bought them at $44 (2x sales, 14.7x EBITDA) at the beginning of 1996 and making it the No. 1 mass market brand. Chris thinks Estee Lauder has a similar game to play here with Revlon if they’re opportunistic enough to see it that way, and thus almost double their total addressable market (mass market being almost as big as prestige).
Editor’s note: The summary bullet points for this article were chosen by the Seeking Alpha editors.