BEAUTY SCORES AGAIN AS REVLON OFFERING GETS OFF TO FAST START
Byline: Sidney Rutberg
NEW YORK — Revlon stock hit the New York Stock Exchange at a gallop Thursday morning.
Priced at $24 a share Wednesday night — well above original estimates — the first trade was at 27 1/4. It soon moved up to 29 1/2, but tailed off as the session progressed. It closed at 27 5/8 on a volume of nearly 8 million shares.
The stock action recalled the first-day trading pattern of the Estee Lauder Cos., which went public Nov. 16 at $26 a share with the first trade on the NYSE at $32. On Thursday, Lauder closed at 36 3/4.
Revlon’s initial public offering of 7.5 million shares of Class A common stock raised about $150 million. An additional $24 million may come in if the underwriters exercise their option to buy another 1 million shares. Although all the proceeds of the offering will be used to reduce debt, the company will remain heavily indebted to the tune of about $1.3 billion.
Rosemary Sisson, high-yield analyst at CIBC-Wood Gundy, said part of the excitement about Revlon is that “it seems to be riding on the coattails of some pretty strong performers, like Estee Lauder.”
“Investors get excited about a particular industry and don’t worry too much about the debt,” she said. “Also, the company has had improving numbers and growth opportunities internationally.” Going forward, Sisson added, there could be an opportunity to refinance the debt at lower rates.
Based on the $27.25 a share price, William J. Fox, Revlon’s chief financial officer, said the market value of the company is around $2.8 billion.
The strength of the Revlon issue is particularly impressive since it was sold into a market that had lost ground in the previous two sessions. On Tuesday the Dow Jones Industrial Average lost 65 points, and on Wednesday it lost another 44 points. Thursday’s session started strong but soon faded and the Dow finished the day down 20.59 points.
Despite the heavy debt load, Fox said Revlon has been growing rapidly and that the debt never prevented the company from taking advantage of opportunities.
“Sales have been growing at double-digit rates, and our market share has been expanding steadily,” Fox said. “Revlon’s share of the mass market in color cosmetics was 19.9 percent in 1995, grew to 21 percent in the fourth quarter of that year and is now at 22 percent.
“We’re only 0.2 percent behind the number-one firm [Cover Girl]. In 1993, we were eight points behind,” he continued.
Allison Lew, an analyst at Credit & Research Trading Group, said she was particularly impressed with Revlon’s market share gains. In addition to its gains in the color cosmetics category, its share in the lip color category in the mass market increased to 34.5 percent in 1995 from 29.4 percent a year earlier, and in nail enamel to 23.7 percent from 21.6 percent.
In facial makeup, Revlon’s market share rose to 15.9 percent from 13.1 percent in 1994.
Revlon’s debt load is a legacy of a hotly contested takeover battle in 1986. Ronald O. Perelman won the company with junk bond financing from the now defunct investment firm of Drexel Burnham Lambert. After the takeover, Perelman sold off all of Revlon’s noncosmetics business to pare down the debt, but as of Dec. 31, 1995, the company still carried long-term debt of $1.29 billion. On the basis of book value, Revlon had a deficit net worth of $651 million on that date.
As a result of the high costs of carrying the debt, the company reported bottom-line losses for the past five years, although sales and profit before special charges and interest were growing. In 1994, for instance, the company’s operating profits before interest more than doubled to $113 million. However, interest costs of $130.4 million more than wiped out those profits. In the fourth quarter ended Dec. 31, 1995, Revlon managed a bottom line profit of $3.3 million.
This is the second attempt by Revlon to raise funds in the public markets to reduce its debt. In 1992, it filed to sell 17.8 percent of the company at $18 to $20 a share, but the offer was withdrawn after the proposed offering price was pushed down to $12 a share.
The sale of stock to the public will only slightly dilute Perelman’s control of the company. After the offering, Perelman will still hold about 60 percent of the Class A shares and all the outstanding Class B shares, which have 10 votes each. As a result, he controls over 97 percent of the voting power.
Lead underwriters of the issue are Merrill Lynch & Co. and CS First Boston, with nine other investment firms in the group.
John E. Fitzgibbon Jr., editor of the IPO Aftermarket, said the strength of the Revlon issue may be related to the large number of co-managers of the issue.
“I’ve been watching this market for 35 years, and I can’t recall another issue that had 11 co-managers,” he said. “Generally, the number of co-managers is directly proportional to the amount of help the company needs to sell its stock.”
Asked what he thought about Revlon stock for the long term, Fitzgibbon said, “The reality is that they have $1.4 billion in debt that they can’t service. My suggestion: buy Estee Lauder.”