By  on April 6, 2006

NEW YORK — The proposed $2.6 billion beauty deal between Alberto-Culver and Regis Corp. ended in an ugly fashion.

Alberto-Culver's plans to spin off its Sally Beauty and Beauty Systems Group to Regis came to an abrupt halt Wednesday night when Regis terminated the deal after Alberto-Culver said its board no longer supported the transaction.

The proposed deal, announced in January, originally called for Alberto-Culver to merge Sally's 2,419 stores and BSG's 822 outlets and 1,244-employee sales force into Regis' $4.5 billion salon business, which operates under the Regis, Supercuts, Vidal Sassoon and Trade Secret banners.

Naming a litany of Regis' financial vulnerabilities, Alberto-Culver's board unanimously voted that it could no longer recommend the plan.

The $3.5 billion Alberto-Culver pointed to Regis' two consecutive earnings shortfall announcements since the two firms entered into the merger agreement, significant revisions to Regis' financial forecasts, uncertainty about Regis' fiscal 2007 outlook and differences in operating approaches as the reasons for not going ahead with the deal.

Under the terms of the merger, Regis could have taken five business days to decide whether to terminate the deal or have Alberto-Culver shareholders vote on the transaction. Winning over shareholders may have been difficult given that nearly 15 percent of the company stock is family owned, noted Linda Bolton Weiser of Oppenheimer & Co. She added that, because Alberto-Culver's board took away its blessing, the merger agreement requires the company to pay Regis a termination fee of $50 million.

The original deal called for Alberto-Culver's shareholders to receive 0.6 shares of Regis for each Alberto share owned. A special cash dividend of $3 also was planned since Sally Beauty was due to get a $400 million loan from Alberto-Culver prior to the merger.

But the Melrose Park, Ill.-based Alberto-Culver hinted it was second-guessing the union in a statement issued March 22 that said: “Alberto-Culver also said today that its board of directors is reviewing recent information regarding Regis' third-quarter results and revised outlook for the fiscal fourth quarter and 2006 fiscal year. Alberto-Culver said it may comment further, as appropriate, after its board of directors has completed its review.”

Asked whether Alberto-Culver will seek another suitor for Sally Beauty and BSG, a company spokesman replied: “It's certainly an option,” adding that one of the main rationales for splitting the two businesses was conflict of interest between the group's consumer products business and distribution arm.Weiser noted that Alberto-Culver could still decide to spin off Sally Beauty, and named L'Oréal as a potential suitor. L'Oréal, under new chief executive Jean-Paul Agon, has become more aggressive on the acquisition front, recently buying Body Shop International and the skin tissue producer SkinEthic.

Alberto-Culver will have to shelve plans to focus solely on its consumer products business.

Speaking at the Bank of America consumer products conference last month, Alberto-Culver's president of consumer products worldwide, V. James Marino, declared, “We will go back to our roots as a consumer products company.”

Had the transaction gone through, Howard B. Bernick, Alberto-Culver's president and ceo, was to retire and join Regis' board as non-executive chairman, and Marino would have replaced Bernick as president and ceo. A company spokesman said Bernick will remain a ceo and Marino will continue to run the consumer products business.

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