Revlon has been downgraded by Moody’s Investors Service Inc. because of the leverage the company is taking on as part of its Elizabeth Arden Inc. acquisition.
Moody’s downgraded Revlon’s corporate family rating to B1 from Ba3, the probability of default rating to B1-PD from Ba3-PD, senior secured credit facility rating to Ba3 from Ba2 and senior unsecured debt instrument rating to B3 from B2. The shift concludes the ratings review period, which Moody’s initiated following the deal announcement.
“The downgrade…is really driven by the high closing leverage of seven times and the aggressive cost-cutting plan that I think clearly has some upside opportunity, but carries some risks, too,” said Moody’s analyst Brian Weddington. “We think there are a fair amount of cost savings in the plan that should be fairly easy to get, but that there are others that could be more challenging. Because Arden is still in recovery mode, it is a little more fragile, so it’s yet to be seen how much aggressive cost-cutting that business can withstand without disrupting the business.”
Revlon announced June 16 that it would buy Elizabeth Arden in a deal valued at $870 million. The deal is meant to create a strategic beauty player with footholds in different categories and geographic markets. Revlon is anticipating about $140 million in cost synergies from the acquisition.
“The company is anticipating things like consolidating sales forces and other types of headcount reductions, and those things tend to have an element of disruption about them for any company,” Weddington said. “Sometimes [when] a change is particularly rapid it can start to show up in sales volatility.”
The transaction is expected to close by the end of the year. It combines Revlon’s mass color cosmetics and hair-care strengths with Arden’s prestige skin care and licensed fragrances. Revlon is also expecting the deal to strengthen it in the Asia Pacific region. In order to go through with the purchase, Revlon’s taking on $2.6 billion in financing, which will refinance Arden’s debt, plus its own term loan and revolving credit facility.
“The rating that we came out with, which is a one-notch downgrade, incorporates the high closing leverage but assumes they will be successful at getting a significant portion of those cost savings,” said Weddington.