Revlon, the well known cosmetics company, is a $1.7 billion market cap company, but 78% of shares are owned by billionaire investor Ronald Perelman, meaning only about $350 million of the company is available to outside shareholders. While a levered capital structure also plays a role, Revlon’s small public float and an illiquid stock lead it to trade at a ~50% discount to cosmetics peers on an EV/EBITDA basis. Simply stated, most investors just can’t own Revlon.
It is no secret that the company is cheap; it has been for a long time. Perelman has owned Revlon for 30 years, and until recently the company was allowed to wallow. I believe a generation of investors have already discarded Revlon, assuming that the only way the valuation gap will close is via a sale to a strategic buyer. These investors fail to recognize that after 30 years of being under managed, it is now clear that Perelman is focused on increasing the share price, and both the stock and company are at an inflection point.
Perelman has hired an impressive new CEO, and the company has a new plan to engage with minority shareholders for the first time ever. Further, after the 2013 acquisition of the Colomer group the company aggressively increased their spending on advertising in an attempt to reinvigorate the brand. Pro forma for the pending acquisition of Elizabeth Arden (RDEN) the company will have doubled revenue over the last 4 years, and EBITDA should nearly double by 2019.
The question must thus be asked, “if revenue has doubled and EBITDA is likely going to double, do we need the valuation gap to close for the investment to be successful?” The answer should be a resounding “NO.” Revlon is no longer a sleepy value company without a catalyst. It is a platform growth company trading at a very cheap price with a controlling shareholder that is focused on improving the company, and the stock price. When the broader investment community wakes up to what is happening at Revlon, I suspect that our investment will do very well.
The above commentary has been excerpted from a letter to clients of Laughing Water Capital.
Disclaimer: This document does not constitute an offer to sell or the solicitation of an offer to purchase any security or investment product. Any such offer or solicitation may only be made by means of delivery of an approved confidential offering memorandum. Past results are no guarantee of future results and no representation is made that an investor will or is likely to achieve results similar to those shown. All investments involve risk including the loss of principal. An investment in the Fund may be deemed speculative and is not intended as a complete investment program. It is designed only for sophisticated persons who are able to bear the risk of the substantial impairment or loss of their investment in the Fund. The Fund is designed for investors who do not require regular current income and who can accept a high degree of risk in their investments. Prospective investors should carefully consider the risk factors specified in the Offering Memorandum before making a decision to invest in the Fund.