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AN OPEN LETTER TO THE CHAIRMAN & CEO OF MACANDREWS & FORBES
Dear Mr. Perelman,
After conducting an in-depth valuation analysis of Revlon, we believe the shares are deeply undervalued and not reflective of the overall company ’s equity value. This distorted “minority class” share price not only affects non -controll ing shareholders, but also depresses the value of MacAndrew’s & Forbes’ (M&F) controll ing stake.
In the fol lowing presentation, we propose strategies with which to address the public f loat in order to maximize Revlon’s long term enterprise value. A couple of these options require a proactive stance by M&F, while one is a defensive strategy minority investors can employ. M&F and minority investors should each be aware of the other ’s options. One strategy available to you is particularly attractive with respect to its potential profitabil ity.
Similar to the tender offer M&F made in 1987 for the 63% of Revlon it did not own, we believe a tender today for the remaining 22% public f loat of Revlon that M&F does not own could increase f irm value by $2.2B, and allow your holding company to capture $1.7 bil l ion in profits, net of the tender cost. This equates to $1.3B of net marginal profits above and beyond potential value realization through a sale of the company to a strategic acquirer with no preceding M&F tender offer .
While we know you take pride in building and adding value to companies rather than capturing arbitrage, we hope you wil l embrace the logic of our proposal and the embedded opportunity within Revlon. Please feel free to contact our off ice with any questions.
Happy Holidays,
Bradd Kern Managing Director Armored Wolf, LLC [email protected]
REVLON (REV) IS AN 80-YEAR OLD BEAUTY
& PERSONAL CARE PRODUCT COMPANY
Consumer Professional
REV operates in two segments with multiple brands
PF LTM 9/30/14 Consumer % Total Professional % Total Total
Sales ($ millions) $1,429.2 74.0% $501.8 26.0% $1,931.0
Segment EBITDA $338.9 78.0% $95.4 22.0% $434.3
% margin 23.7% 19.0% 22.5%
1
REVLON SELLS INTO THE MASS MARKET
AND PROFESSIONAL CHANNELS GLOBALLY
United States
International
Consumer Professional
52% of sales
48% of sales
2
RECENT DEVELOPMENTS
October 2013: Revlon simplifies capital structure when Perelman converts
all 3.125M of M&F’s Class B shares (entitling him to ten votes per share) to
egalitarian Class A shares.
October 2013: Completes $660M acquisition of The Colomer Group (TCG)
from CVC Partners for 9.2x EBITDA, a business Revlon had sold to CVC 13
years ago.
TCG’s CEO Lorenzo Delpani named president and CEO
Professional products adds a new distribution channel
$30M to $35M of annualized cost reductions identified for
implementation by end of 2015.
August 2014: Armored Wolf sends confidential letter to Ron Perelman to
recommend options for Revlon value creation. Receipt is acknowledged but
no other response is provided
November 2014: Following Delpani’s stated product strategy mantra of
“fewer, bigger, better”, Revlon unveils a “global brand re -launch” featuring
the “Love Is On” advertising campaign
3
HIGH, STABLE FREE CASH FLOW SUPPORTS
A LEVERED CAPITAL STRUCTURE
4
Cash and Equivalents 178.4
Acquisition Term Loan due 2019 693.3
2011 Term Loan due 2017 671.3
5.75% Senior Notes due 2021 500.0
Other 8.6
Total Debt 1,873.2
Market Capitalization @ $34.57/share 1,810.0
Enterprise Value 3,504.8
Net Debt 1,694.8
2014E Adj. EBITDA 365.4
EV / EBITDA (2014E) 9.6x
Net Leverage '14E 4.6x
Interest Coverage '14E 3.8x
Capitalization as of 9/30/14
EBITDA 365.4
Capex* -95.0
Cash Interest -96.9
Cash Taxes -20.0
Changes in W/C 0.0
Pension Contribution -25.0
Free Cash Flow 128.5
REV Market Cap 1,810.0
FCF Yield 7.1%
*includes purchase of permanent wall displays
Levered Beta (2-year) 0.98
Unlevered Beta 0.57
Free Cash Flow (2014E)
THROUGH WHOLLY OWNED HOLDING COMPANY
MACANDREWS & FORBES, RON PERELMAN OWNS
78% OF REVLON CLASS A SHARES
Minority Shareholders Own 22% of Class A Shares
100%
78%
5
WHAT ARE THE IMPLICATIONS OF
MINORITY OWNERSHIP?
• Although M&F owns the same class of shares as minority
holders (Class A), there are effectively two share classes:
M&F’s Shares: theoretically, should trade at a premium to fair
value due to the valuable element of control
Minority Shares: in practice, trade at a large discount to fair
value due to presence of controlling shareholder MacAndrews
& Forbes. Academic research suggest that all things equal,
investors pay less for assets where access to corporate
governance as a venue for monitoring and recourse is
restricted by minority share of ownership1
• Minority holder’s lack of power renders their votes meaningless
and thus the shares less valuable
• Fear of a short form merger at an inopportune time keeps an
artificial lid on the stock price
• While Revlon has a majority independent board, minority
shareholders’ lack of trust is impacting the value of M&F’s 78%
stake
6
1Aswath Damodaran, “The Value of Control: Implications for Control Premia, Minority Discounts and Voting
Share Differentials,” http://people.stern.nyu.edu/adamodar/pdfiles/papers/controlvalue.pdf (June 2005)
CONTROLLED OWNERSHIP RESULTS IN A
MASSIVE DISCOUNT TO GLOBAL PEERS
• Comps imply REV is worth $61/share, 76% upside from
$34.57/share. An adjusted present value-style DCF to
accommodate REV’s rapid de -leveraging yields a similar value
• Despite above average EBITDA margins of over 19%, REV trades
at an astounding 4x EBITDA discount to global peers
• The comps with the most similar EV/EBITDA ratio to REV are
Natura, which is a Brazilian cosmetics manufacturer that sells
through multi-level marketing, and Shiseido, a Japanese
consumer product company with only 10% EBITDA margins.
These are clearly not the closest comps of the group
7
Company Share Price
Unlevered
beta (2Y)
Market
Cap ($M) EV ($M)
Sales
(TTM, $M)
EV/ EBITDA
(FY1)
P/E
(FY 15)
P/S
(TTM)
GPM
(TTM, %)
EBITDA
Margin
(TTM, %)
Net
Leverage
(TTM)
REVLON INC-A* 34.57 0.57 1,810 3,505 1,938 9.6 16.9 0.9 65.6 18.9 4.8x
ESTEE LAUDER 75.78 0.80 28,767 28,719 10,925 13.8 22.1 2.7 80.3 19.4 0.0x
L'OREAL 137.45 0.47 94,578 93,455 27,537 16.1 22.9 3.7 71.3 20.9 -0.2x
L'OCCITANE INTL 19.04 0.47 3,626 3,424 1,345 12.9 21.5 2.7 80.7 18.0 -0.9x
PROCTER & GAMBLE 92.00 0.36 248,595 272,857 83,788 14.0 19.6 3.0 48.8 20.7 1.3x
SHISEIDO CO LTD 1682 0.49 5,660 5,853 6,456 9.9 28.4 0.9 75.5 10.2 0.0x
NATURA 30.92 0.22 5,007 5,931 2,776 9.5 14.1 1.8 69.5 21.7 1.5x
COTY INC-CL A* 20.04 0.67 7,128 9,464 4,556 12.0 20.8 1.6 58.8 17.5 3.0x
AMOREPACIFIC COR 2259000 0.86 11,981 11,598 3,266 18.4 27.6 3.7 72.8 18.3 -0.7x
Average (ex-Revlon) 0.54 13.3 22.1 2.5 69.7 18.3 0.5x
Median (ex-Revlon) 0.48 13.4 21.8 2.7 72.0 18.9 0.0x
Implied REV price based on average $60.5
Implied REV price based on median $61.0
Weighting: 50% average and 50% median $60.7
*For REV, using LTM 12/31/14E rather than trailing twelve months (TTM); Coty EBITDA margin and net leverage based on FYE 6/30/15E
Source: Bloomberg, Armored Wolf
Upside / (Downside)
75.7%
WHY IS THE DISCOUNT A PROBLEM?
• The 22% outstanding minority shares distort 100% of the enterprise
value. It will be difficult for M&F to maximize Revlon's value as long
as the shares remain outstanding because studies show (Daniel
Kahneman) potential acquirer’s will be “anchored” to the “minority
class” share price
This anchor dynamic affects Perelman's controlling 78% stake as
much (and much more on a $ basis) as the 22% minority class
• 76% upside to fair value of $61/share would merely normalize REV’s
value by reversing the effects of the minority discount. $61 is before
any control premium. Assuming a 25% control premium, when is the
last time an acquirer of a public, multi -billion consumer company paid
a 120% premium ([1.76*1.25]-1 = 120%)?
Any potential takeover price will be depressed until the issue is fixed
• The company’s “weak currency” in the form of a depressed share
price is a long-term disadvantage for M&A
• When MacAndrews & Forbes pledges Revlon shares in order to borrow
(which they do), M&F’s borrowing base is depressed by the low price
of the 22% public float
In summary, the value of Revlon is not being maximized
due to the distortionary effects of REV’s share price
8
HOW TO ELIMINATE THE DISCOUNT?
THERE ARE TWO VIABLE OPTIONS
• Perelman could tender for the remaining 22% of shares
• Under Delaware law, if just 12% of REV shares tender,
increasing M&F ownership to 90%, M&F can effect a
“freeze-out” merger and pay the remaining 10% of holdouts
the final price paid that raised M&F ownership to 90%
• By eradicating the minority “share class” along with its
distorted share price, potential acquirers will no longer be
anchored to an inappropriately low value
• Valuations thereafter can only focus on comps and
intrinsic value, both of which imply >$60/share
1) M&F can tender for shares and effect a short form merger
At a 25% premium, a REV tender would cost $498M but
yield a future value benefit to M&F of $1.3B on margin (in
excess of a sale at 35% control premium with no tender),
net of the tender cost, assuming a sale at fair value
($61/share) plus a 25% control premium ($76/share)
9
PERELMAN HAS TENDERED FOR REVLON
SHARES IN THE PAST, AND DONE WELL
• April 1987: MacAndrews & Forbes announces it is considering a
$720M tender offer for 63.4% of Revlon shares Perelman does
not own at $18.50/share. The stock initially trades up 24% from
$14.75 to $18.25
• On the actual tender offer from M&F, shares trade up to $19.25
• Ultimately, Perelman pays ~$800M at $20.10 per share to take
Revlon private, up 36% from the initial announcement
• Diane Temple, a Salomon Brothers analyst at the time is quoted
in the Wall Street Journal saying REV shares are worth $25 to
$30 per share ($27.50 = 37% above M&F price paid), but does not
expect another bidder to emerge (she was right)
Relative to the price prior to news of the tender, shareholders
did very well. Relative to what sell-side analysts were calling
fair value, Perelman did very well. Both parties won
10
HOW TO ELIMINATE THE DISCOUNT?
THE SECOND OPTION
• Revlon is one of the most recognizable and historically
significant brands in beauty products
• Revlon should appeal to both U.S. and international buyers
due to its balanced mix of global revenues and assets
• However, integration with The Colomer Group is still
underway and it would be unusual for a company to sell
itself before attempting to realize its target synergies on a
significant deal
• In the past, various strategic buyers have expressed
interest in a Revlon acquisition
2) M&F can seek a strategic buyer for the entire company
We estimate Revlon would fetch a 35% or higher premium
in a takeover, equating to at least $47 per share.
11
COMPARISON OF TWO M&F STRATEGIES
Net of the $498M tender cost, Perelman could
generate $1.7B in net profits by tendering today
for Revlon minority shares at a 25% premium
Tendering at a 25% premium, followed by a sale to a strategic
acquirer with a 25% control premium would yield $1,299 million
($1,684.5 – $385.4) more in profits for M&F than a sale with a
35% control premium not preceded by an M&F tender offer
12
#2: Sale to Strategic Only #1: Tender + Sale to Strategic
Current
Fair
Value
+25% Control
Premium
Gross $
Gain
Per Share Value $34.57 $61.00 $76.25 $41.68
% change 76.5% 120.6%
Equity Value $1,810.0 $3,193.8 $3,992.2 $2,182.2
Existing M&F
Ownership
Tendered
Shares Total
78.0% 22.0% 100.0%
$1,702.1 $480.1 $2,182.2
40.838 11.518 52.357
- $43.2 $43.2
- -$497.7 -$497.7
$1,702.1 -$17.7 $1,684.5
Attribution Analysis
% split
$ Attribution, gross
# shares
Tender Cost
Tender Price/Share (25% Premium)
$ Attribution, net
Current
Fair
Value
+35% Control
Premium
Gross REV
$ Gain
Per Share Value $34.57 Not $46.67 $12.10
% change Achievable 35.0%
Equity Value $1,810.0 $2,443.5 $494.1
Note: 78% Ownership
M&F
Ownership
Public
Float Total
78.0% 22.0% 100.0%
$385.4 $108.7 $494.1
40.838 11.518 52.357
$385.4 $108.7 $494.1$ Attribution, net
Attribution Analysis
% split
$ Attribution, gross
# shares
RANGE OF PROFITABILITY, NET OF TENDER COST
TENDER + SALE STRATEGY
Profits, net of tender:
13
Control Premium Paid By Strategic Acquirer
Te
nd
er P
re
miu
m
Pa
id
B
y M
&F
$1,684.5 20.0% 22.5% 25.0% 27.5% 30.0%
17.5% $1,555 $1,635 $1,714 $1,794 $1,874
20.0% $1,545 $1,625 $1,704 $1,784 $1,864
22.5% $1,535 $1,615 $1,694 $1,774 $1,854
25.0% $1,525 $1,605 $1,684 $1,764 $1,844
27.5% $1,515 $1,595 $1,675 $1,754 $1,834
30.0% $1,505 $1,585 $1,665 $1,744 $1,824
32.5% $1,495 $1,575 $1,655 $1,734 $1,814
Marginal net profits in
excess of sale only:
Control Premium Paid By Strategic Acquirer
Te
nd
er P
re
miu
m
Pa
id
B
y M
&F
Sale only scenario
(option # 2) assumes
35% control premium
Net profit of $1.68B
million corresponds
with gross profit of
$2.18B (tender cost
of $498 million)
$1,299.1 20.0% 22.5% 25.0% 27.5% 30.0%
17.5% $1,169 $1,249 $1,329 $1,409 $1,489
20.0% $1,159 $1,239 $1,319 $1,399 $1,479
22.5% $1,149 $1,229 $1,309 $1,389 $1,469
25.0% $1,139 $1,219 $1,299 $1,379 $1,459
27.5% $1,129 $1,209 $1,289 $1,369 $1,449
30.0% $1,119 $1,199 $1,279 $1,359 $1,439
32.5% $1,110 $1,189 $1,269 $1,349 $1,429
REVLON SHARE VALUE SCHEMATIC
$34.57 $47 $61 $67 $76+
Minority
Share Value =
Market Value
of REV Shares
REV + 35%
Control
Premium
M&F Share
Value = FV +
10% control
premium
REV Fair
Value (FV)
Value to
Strategic = FV
+ 25% Control
Premium
+35% +76% +94% +120%
M&F should pursue option #1 and tender for 22% of shares at
~$43/share to capture upside to $76/share on 100% of shares
Multiple of EBITDA:
9.6x 11.4x 13.4x 14.2x 15.5x
14
RISKS TO M&F WAITING
1. REV shares will appreciate over time due to a combination
of i) the stock’s deeply undervalued nature, ii) rapid de -
leveraging that accrues to equity, and iii) new management
initiatives to boost sales and improve financial results,
making M&F’s cost to take Revlon private more expensive
2. Through open market and block purchases, one or multiple
minority shareholders could build a combined 10% position
and either independently or in partnership with another
one or two large holders make a short form merger either
impossible or much more expensive. With more dispersed
ownership, success at blocking a squeeze-out, or even an
attempt to do so, is less likely
3. Even in the absence of significant improvement at Revlon,
the minority discount that makes REV shares such a
bargain may close over time if investors were simply to
announce that they had formed a 10% consortium to block
the possibility of a short form merger
We each own 4%, Bill has
another 2%. Let’s block a
REV squeeze-out merger.
I like the way you
think. Love Is On!
15
FINAL THOUGHTS
• Based on valuation and gradually improving company
fundamentals, REV shares are attractive whether M&F
tenders or not. The possibility of a tender is a free call
option
• Tendering for the remaining 22% of shares adds
demonstrable value to the entire M&F stake, plus provides
M&F with 100% of the future upside versus only 78%.
• Leaving $1.3B of marginal value on the table would be
antithetical to capitalist values
• While Perelman considers his options, new and existing
minority investors should consider what actions they can
take to reduce the minority discount in the absence of a
tender, such as forming a blocking position against
Perelman’s ability to effect a short form merger
• M&F will never achieve the highest price for its stake while
the minority shares remain outstanding. The sooner the
tender, the less relevant the current, distorted minority
class share price will be to the value of the overall firm
16