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Perelman Steps Up, Plans to Inject $150M Into Troubled Revlon

<br><br>NEW YORK — Christmas came a week early for Revlon Inc. <br><br>The cosmetics firm, based here, said Wednesday that its primary shareholder, Ronald Perelman, proposed to make available, through his wholly owned MacAndrews & Forbes...

NEW YORK — Christmas came a week early for Revlon Inc.

This story first appeared in the December 19, 2002 issue of WWD.  Subscribe Today.

The cosmetics firm, based here, said Wednesday that its primary shareholder, Ronald Perelman, proposed to make available, through his wholly owned MacAndrews & Forbes Holdings, financing of $150 million through a combination of a $50 million rights offering and a $100 million line of credit.

Revlon said the money would be used to fund the company’s growth plan.

At the same time, Revlon, in a statement, said, “a selective rationalization of the company’s product offerings, selected pricing adjustments, and other aspects” of its growth plan will subtract about $90 million to $130 million from the bottom line over the next several quarters, beginning with the fourth quarter ending this month.

That’s certain to compound Revlon’s streak of unprofitability. In the first nine months of the current year, Revlon’s losses dropped to $107.1 million, or $2.05 a share, from $125.4 million, or $2.40, a year ago, losses from ongoing operations rose to $87.1 million from year-ago losses of $44.9 million. Sales for the first three quarters of 2002 slid 5.1 percent to $906.8 million from $955.9 million a year ago

In 2001, losses widened to $153.7 million from the $129.7 million of red ink accumulated in 2000. Losses from operations narrowed to $51.4 million from $80.8 million in the prior year.

Through MacAndrews, Perelman owns 53 percent of Revlon’s Class A stock and 100 percent of the Class B shares, making for an 83 percent stake in the total company. Under the financing plan, that percentage wouldn’t change substantially unless other shareholders decline to purchase the additional equity offered.

Under the proposal, Revlon would make a $50 million rights offering that would enable shareholders to purchase additional Class A common stock. MacAndrews would purchase its pro-rata share of the offering and back up the rest of it by buying any stock not picked up by other shareholders. The offering would replace a previous commitment by MacAndrews to provide up to $40 million in financial support.

Also under the proposal, MacAndrews would extend to Revlon a $100 million senior unsecured noncash-interest line of credit, maturing Dec. 1, 2005. The interest on the line of credit would be payable in kind.

Based on in-market test results, Revlon said it would also accelerate certain elements of its previously announced growth plan, including advertising spending and strengthening of the firm’s in-store merchandising and marketing presence.

Revlon said its plan for growth “involves enhancing the total brand experience of its products, delivering world-class execution and innovative customer solutions, developing the next generation of successful products, and creating a winning culture.”

Investors reacted to proposed financing and shifts in the firm’s plan by trading Revlon’s shares down 7.3 percent, or 25 cents, to $3.20 Wednesday on the New York Stock Exchange. Over the last 52 weeks, the firm’s stock has traded as low as $1.85 and as high as $6.88. The Dow Jones Industrial Average dropped 88.04 points, or 1 percent, to end the day at 8,447.35.

“Revlon now has in place the leadership team and strategy to capitalize on the underlying strength of the Revlon brands,” said Perelman in a statement. “These factors increase my excitement about Revlon and reinforce my commitment to the business.”

Jack Stahl, who joined the firm from Coca-Cola in February as president and chief executive, added in the statement: “This investment by MacAndrews & Forbes will enable Revlon to continue to take the actions necessary to strengthen and aggressively grow our business for the benefit of our company, our retail partners and our consumers.”

A Revlon spokeswoman declined to elaborate further on the financing or the firm’s growth plans, citing “quiet period” Securities and Exchange Commission regulations.

Revlon’s board of directors has formed a special committee to consider the proposal, and is expected to retain special counsel and a financial adviser to assist in its evaluation. If the special committee approves the deal, Revlon said it anticipates the $100 million line of credit would be available in January while the rights offering would be consummated during the second quarter. The offer is also subject to necessary stockholder, regulatory and other third party approvals as well as the negotiation of definitive terms.

The firm also expects the proposal, as well as the effect of the accelerated growth plan, to require amendment of its existing credit agreement as well as a waiver of its earnings before interest, taxes, depreciation and amortization covenant for the fourth quarter. Revlon said that, based on preliminary discussions with its bank group, it expects to secure the required amendment and waiver.

Revlon is in the midst of a massive turnaround effort, which first entailed cost rationalization and, since Stahl’s arrival, has shifted toward stabilization and growth of the business. The company rolled out a second turnaround plan in as many years in August, as questions of liquidity and a lack of profitability dramatized the need for new direction.

Stahl has set a long-term goal for the company entailing 10 to 12 percent annual revenue growth, with EBITDA slated to grow faster than revenues.

The company’s been struggling under a heavy debt load, though, which at the end of the third quarter on Sept. 30 weighed in at $1.72 billion. Through MacAndrews & Forbes, Perelman acquired control of Revlon in 1985.

After third-quarter results were reported, Standard & Poor’s placed Revlon’s debt on CreditWatch with negative implications. “Revlon’s financial flexibility has declined substantially in 2002,” the rating agency said in a statement.

There were signs of hope, however, as a step-up in the marketing of the Revlon brand in late August helped boost the brand’s September U.S. market share in color cosmetics 140 basis points against a year ago to 17.1 percent, according to ACNeilsen.

During the third quarter, the Revlon brand’s U.S dollar market share in color cosmetics climbed 60 basis points from a year ago to 16.7 percent. On the other hand, the Almay brand’s share of the color cosmetics market dipped 20 basis points during the quarter to 5.5 percent. In the end, Revlon’s overall color cosmetics dollar market share during the third quarter stayed flat at 22.4 percent.