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Much of the information in this report appears to have been entirely missed by the market. Only 5-10% of Revlon’s shares are in the public float. Only a single analyst covers the stock with only very perfunctory coverage.
Revlon’s latest 10Q (May 2018) contains a subtle seven-word change from what was disclosed in the 10K in March. This disclosure now signals that Revlon is gearing up to conduct “asset transfers”, stripping bondholders of collateral so that Revlon can raise between $500 million and $1 billion to ramp up its turnaround program.
Such a move is punishing to bondholders but will be sharply rewarding to shareholders because it demonstrates that billionaire Perelman is now entering the final stages of taking Revlon private.
J Crew had made use of a similar “trap door” feature last year to strip bondholders of collateral by shifting IP assets into unrestricted subsidiaries. But Revlon’s ability to move assets to the benefit of shareholders is far, far greater. According to Debtwire: “the trap door mechanics in Revlon are a bit different from J.Crew’s. Revlon’s trap door is more like a black hole.”
Perelman is unequivocally betting on a successful turnaround at Revlon. But he is also using the turnaround plan to acquire his new shares near multi year lows. In 2017, Perelman increased his stake in Revlon to 84.65%, paying up to $23.50. But many of his shares were acquired near multi year lows simply because his turnaround plan front-end-loads the expenses, pressuring the share price.
Right after the about-face on disclosure regarding asset transfers, Revlon immediately appointed Perelman’s daughter (Debra Perelman) as CEO.
Perelman already owns 84.65% of Revlon. In September 2017 he agreed to a standstill at the request of Mittleman Investment, the second largest shareholder. But it was later realized the standstill to which Perelman agreed does not preclude him from making a tender offer in the interim.
Perelman has repeatedly engaged in the same tactics to acquire past companies at bargain prices following very short-term quarterly weakness in financial results which were the predictable result of a planned restructuring.
Because Perelman already owns 84.65% of Revlon, the price he pays for the remaining 15.35% stub will not have a meaningful effect on his overall average price. So he can certainly pay a significant premium. Mittleman claims that current fair value should be from $50 to $100. But actually, market comparables would put the price target closer to the lower end of $40-50 at present. In reality, Perelman will attempt to acquire the remaining 15.35% stub as cheaply as possible. He may be able to acquire the final shares at $32-36.
However, due to Revlon’s very low public float and high short interest, the share price could easily overshoot on any positive update. Short interest is over 2 million shares even though the tradable free float is just 5.2m shares (a 40% effective short interest).
This report is the opinion of the author. It is not a recommendation for anyone anywhere to do anything at any time. Do your own research, form your own opinions. The author is not an investment advisor. The author may conduct transactions on various securities mentioned in this report (or competitors, comparable companies, other securities etc.) within 72 hours.
The author is LONG REV.