The Revlon-Arden Marriage: A Problem Solver for Both?
June 16, 2016
Revlon Inc. could be the answer to many of Elizabeth Arden’s problems — and vice versa.
“Although neither company has been really thriving, they’re not dead,” said Andrea Weiss, founding partner at The O Alliance. “This isn’t like they combined two really bad companies hoping to get a better outcome. There are a lot of assets in both portfolios, and if you could really get those synergies that are being projected…you could end up with a significantly more productive entity.”
Revlon agreed to pay $870 million — $14 per Arden share — to take the beauty firm under its slightly larger wing on Thursday evening. The deal is expected to produce $140 million in cost synergies and comes with $2.6 billion in financing. On Friday, Moody’s Investors Service placed Arden’s ratings on review for an upgrade — its debt would be paid off through the loan — and Revlon’s ratings on review for a downgrade because of the deal.
The new financing is being used to fund the $870 million purchase price, which includes extinguishing Arden’s roughly $425 million in long- and short-term debt. Revlon, which has about $1.83 billion in debt, will also use the loan to refinance its bank term loan and revolving credit facility.
Moody’s analyst Brian Weddington said while the firm is still examining the transaction, leverage for Revlon will likely surpass seven times.
Revlon chief financial officer Juan Figuereo said on a conference call Thursday that there “will be cost upfront for capturing those synergies” and that Revlon is “looking at 4.2 turns of leverage assuming full realization of the synergies of the $140 million. The company will be very cash-generative once combined. And so, the ability to de-lever is actually very strong.”
“The success very much hinges on their ability to get those cost savings,” Weddington said.
The deal is expected to go through, according to a research note by B. Riley & Co. analyst Linda Bolton Weiser. “If [Arden] were not still a ‘fixer-upper,’ just Elizabeth Arden alone [40 percent of sales], one of the last independent iconic brands in the beauty industry, would have fetched…$800 [million] to $1.2 [billion],” she wrote. “It makes sense,” she said, analyzing the worth of the deal from an Elizabeth Arden standpoint.
“It’s a wonderful outcome for Arden because they have been struggling,” said Weiss. “The celebrity endorsement route that they have taken seems to have run its course.”
Revlon and Arden have struggled as midsize companies in a rapidly consolidating beauty climate dominated by much larger players. Revlon reported slight improvement recently, with net income of $11 million from a $900,000 loss year-over-year for the latest quarter, while Arden reported a $27.7 million net loss for the quarter — reduced from the $34 million loss in the prior-year period.
The merger will create a beauty business with roughly $3 billion in annual sales — bringing it up into the top 20 beauty companies globally. It also creates a platform that has a hand in all major categories: mass, prestige, professional, color cosmetics, skin care and fragrance. And it fills in the gaps globally — Arden is strong in China, where Revlon is not, and Revlon is stronger in Latin America, where Arden could use more of a presence, sources said. Arden chairman and chief executive officer E. Scott Beattie singled out Latin America as a key market for fragrances, while Revlon ceo Fabian Garcia echoed with interest in Brazil — where Revlon does not have a presence. “It’s a very large bucket we are interested in,” Garcia told WWD.
“As we look at the synergies that we have, there are countries where we are both strong: the U.S., the U.K. and South Africa. Then you have a bucket of countries where Elizabeth Arden is strong and we are not as strong: South Korea and China. Then you have another bucket of countries where we are strong and they are not as strong: Japan,” Garcia said.
To some industry sources, the transaction is reminiscent of Coty Inc.’s expansion.
“Although much smaller in scale than companies like L’Oréal and Coty, it seems this combined entity over time may try to play across all channels and product categories,” said Andrew Charbin, vice president at The Sage Group. “This deal will help increase the prestige component of Revlon’s business and give it some entry into skin care, an area it was under-indexed in.”
“This acquisition is really putting the business in the department store sector,” said Jane Hali, ceo of investment research firm Jane Hali & Associates. “Revlon sells at Wal-Mart, Target, grocery stores and drugstores. Color cosmetics are selling very well and that helps both companies, but actually, Elizabeth Arden is bringing skincare to the mix.”
Still, there are doubters about the deal.
“I understand the mosaic (or patchwork) strategy — combine the strengths of each company to build a stronger overall business. In this case, it seems Revlon sees the geographic opportunity,” said Wendy Liebmann, ceo of WSL Strategic Retail. “But I’m not sure that’s enough. There’s so little other business synergy. Arden is a fragrance and skin-care house. Revlon a color cosmetics and hair-color business. Different price points and distribution. So not a easy opportunity — if there’s one at all.”
Retailers also don’t look upon the deal as favorably as the financial community. Initial mass-market retailer reaction to the purchase struck a similar chord to Coty’s purchase of the P&G brands last year — that they wish the acquiring company was in better shape before adding more challenges. “I guess these new guys at Revlon are aggressive in their approach,” said one retailer, who requested anonymity. “I wish they would run Revlon better first.”
Although there has been a glimpse of uptick for some Revlon brands, retailers said Almay is withering. Another retailer likened the acquisition to the merger of Kmart and Sears, which has never clicked on all cylinders.
“It feels to me that they want diversity similarly as Coty has diversity of trade channels and L’Oréal has diversity of trade channels. As mass potentially flattens or declines, and specialty grows, they now have brands that fit into specialty. As dollar outlets grow and department stores decline, they have brands that fit. The money cow for Elizabeth Arden is the secondary fragrance business and their owned brands and even those are declining,” said one chain executive.
Revlon has chalked up gains in a few facial categories, according to IRI data for the 52-week period ended March 20, such as an increase of 22 percent for PhotoReady Powder and ColorStay Powder which notched a 7.8 percent increase.
Chain executives said they were caught off guard as they thought Revlon itself was looking for a suitor, at least for its struggling Almay. “Perhaps this is to fatten it up to be more attractive,” one wondered.
Shareholders seem to be on board for the merger, sending stock prices for both companies upward on Friday. Arden’s stock closed at $13.88, up more than 49 percent, and Revlon’s shares closed up about 6.6 percent, at $33.25.
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