Revlon Gets a Glam Makeover

Cosmetics giant acquires Elizabeth Arden for $419 million to expand global footprint

Cosmetics giant Revlon Inc. (NYSE: REV) and iconic beauty products Company Elizabeth Arden Inc. (NASDAQ: RDEN) announced after market closed on Thursday, June 16th, 2016, that they have signed an agreement as per which Revlon will acquire Elizabeth Arden for $14.00 per share in an all cash deal for about $419 million. The share price represents a 50% premium over Elizabeth Arden’s closing price on Thursday, June 16th, 2016, valuing the Company at approximately $870 million, as reported by Bloomberg. The deal is the second largest acquisition in the beauty industry after Coty Inc.’s (NYSE: COTY) buyout of Procter & Gamble Co.’s (NYSE: PG) beauty business, including CoverGirl, for $12.5 billion in 2015.

Not so colorful anymore

Source: Company's Website
Source: Company’s Website

Both Revlon and Elizabeth Arden have been struggling in recent times, having failed to recognize the changing preferences of today’s women. Revlon has been weighed down by its debt and badly needs a change in strategy after witnessing a 19% stock drop in 2015. Although the Company reported a profit of $11 million in Q1 FY16, following a $0.9 million loss in the year-ago quarter, its cosmetic products seem to have lost their vibrant appeal among young consumers. What’s more, Revlon’s current “Love Is On” ad campaign has failed to ignite interest among its target audience.

On the other side of the rocky boat, celebrity fragrances, a key part of Elizabeth Arden’s products’ portfolio, seems to have fallen off the popularity charts. In addition to skin care and makeup, Elizabeth Arden sells fragrances under celebrity names such as Taylor Swift, Britney Spears, and Elizabeth Taylor. Elizabeth Arden’s annual sales plunged 28% to $971 million between FY13 and FY15. Adding to its woes, the Company has posted almost $400 million in losses over the past two years, making it a prime buyout target in the past. South Korea’s LG Household & Health Care Ltd. was considering acquiring the Company in 2014, but ultimately decided against it.

Revlon could revive Arden’s fortunes

Given Elizabeth Arden’s precarious situation, Revlon, in which billionaire Ron Perelman holds a controlling stake, sees an opportunity to revive the fortunes of the ailing Company. Revlon hopes to benefit from Elizabeth Arden’s forte in prestige skincare and fragrances, which would well complement Revlon’s strength in lipstick and nail varnish, hair care and men’s grooming. While Revlon sells its products mainly through mass retailers and beauty salons, Elizabeth Arden has a strong presence in high-end and travel retail channels.

Arden also occupies shelf space in high-end department stores like Nordstrom Inc. (NYSE: JWN) and in outlets like airport stores, which would complement Revlon’s strength in channels such as mass merchant retailers and drugstores. Through the deal, Revlon is looking to expand its footprint in fragrances and skin care, and pursue growth opportunities in China and other Asian countries where Arden has a huge presence.

Cost savings

R2Elizabeth Arden, which has witnessed a huge slump in sales in recent years, announced a restructuring program to improve profitability in 2014. That did not help after the Company reported a net loss of $28.4 million in the quarter ended March 31st, 2016. After its impending merger with Revlon, the combined entity expects to achieve annual tax savings of about $140 million through the elimination of duplicate activities, leveraging purchasing scale, while optimizing manufacturing and distribution networks.

Deal to explore synergies

Revlon will hugely benefit from greater scale, an expanded global footprint, significant presence across major beauty channels and categories, and the addition of Elizabeth Arden’s prestige skin care, color cosmetics, and fragrances. Both companies are also looking to expand their geographic footprint; they currently sell their products in more than 120 countries. Also, both companies are focusing on online sales, in which Revlon has done better so far. The merged entity will leverage Revlon’s scale across major vendors and manufacturing partners, thereby improving distribution and procurement.

Transition and integration

Scott Beattie, Chairman, President, and CEO of Elizabeth Arden, is expected to join Revlon’s Board of Directors as non-executive Vice Chairman. He will also serve as a senior advisor to Fabian Garcia, Revlon’s President and CEO, to ensure a successful integration and transition. The deal has been unanimously approved by the board of both companies. However, the merger is still subject to approval by Elizabeth Arden’s shareholders and regulatory clearances, and is expected to close by the end of 2016.

Funding

Revlon will use $2.6 billion of new financing commitments from BofA Merrill Lynch (NYSE: BAC) and Citigroup Inc. (NYSE: C) to fund the purchase and to refinance Arden’s existing debt, as well as much of Revlon’s $1.8 billion in long-term debt.

Guidance

For FY16, on a standalone constant currency basis, without taking into account the pending acquisition, Revlon expects to generate net sales between $2.0 billion and $2.1 billion, implying a high single-digit growth rate, and between $400 million and $420 million in Adjusted EBITDA. For the 12 months ending December 31, 2016, the combined company would be expected to have annualized net sales of approximately $3 billion.

Stock Performance

Revlon’s stock stood at $32.90 at the close on Monday, June 20th, 2016, having reached an intraday high of $34.09 and sliding to a low of $32.82 during the session. The stock’s trading volume was at 82,484 for the day. The Company’s market cap was at $1.62 billion as of Monday’s close.

R3Elizabeth Arden’s stock stood at $13.89 at the close on Monday, June 20th, 2016, having reached an intraday high of $13.93 and sliding to a low of $13.82 during the trading session. The stock’s trading volume was at 1,723,185 for the day. The Company’s market cap was at $279.05 million as of Monday’s close.

R4With the impending merger, Arden’s misery may have come to an end. It remains to be seen whether Revlon will rise again and regain its former glory as a leader in color cosmetics.

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