November 10, 2003
Is Perelman Man of the Moment?

When the dot com melt down began, Amazon’s credit rating was quickly relegated to ‘junk’ status, and by mid-2000 even renowned optimist Henry Blodget – who once said Unlike with other famous bubbles...the Internet bubble is riding on rock-solid fundamentals” - was turning cautious on the stock. Yes, Blodget probably lowered Amazon’s rating in July 2000 because Time magazine's 1999 "Person of the Year” (Bezos) didn’t promise his bosses enough business. Regardless, in 2000 and 2001 - as Amazon shareholders’ deficit soared, insiders dumped, and the outlook for cash flows turned into dreams of pipes - AMZN increasingly looked likely to go the way of numerous other failed dot com experiments.


Suffice it to say, Amazon has skirted destruction; the company’s net equity deficit is crawling back from the brink, $200 million in debt payments are being made, and its stock price is soaring (suggesting that even under the worst circumstances more funding could easily be achieved via an equity offering).  As evidence of this turnaround, S&P recently raised AMZN’s outlook to positive and reaffirmed the company’s “B” credit rating.


While Amazon serves as success story – at least for the time being – another company could prove a failure.

Revlon Incorporated

“We are all for 'bottom fishing', but Revlon may be too deep to reach…”  Wish List 2001. December 26, 2000.

It has been nearly 3-years since we first mentioned Revlon, and, astonishingly, there is little new news to report.  In fact, the methodical demise of the company Charles Revlon founded more than 70 years ago remains in its final stages…the stage it has been in since the late 1990s.

For those unfamiliar with the specifics of the company, the roadblock that keeps Revlon from insolvency is one Ron Perelman -- the flamboyant billionaire who previously went down with the Marvel ship, and has captained Revlon since 1985.  Mr. Perelman not only controls more than 80% of Revlon, he also lends the company his checkbook from time to time; the latest helping hand being roughly $200 million in play money for new Revlon boss Jack L. Stahl.

The quagmire Mr. Perelman finds himself in today is the same one he waded through in 2000. Back then Perelman purchased up to $250 million in debt as it neared maturity to give then Revlon boss, Jeffrey Nugent, some breathing room to ‘cut costs’. Three years, and an unbreakable string of quarterly losses later, Perelman is faced with negotiating new terms for $250 million in debt at the end of January 2004, and dealing with roughly $700 million in debt due in 2005. Will Perelman stave off a debt default yet again? 

Incidentally, the problem with Revlon’s ongoing restructuring plan is self evident.  To be sure, consider the plan, as concocted back in 2000:

“Revlon's plan consists of three main components: (1) the cost rationalization phase; (2) the stabilization and growth phase; and (3) the accelerated growth phase.”

With the above plan in mind, consider what Revlon said late last year:

“In December 2002, Revlon announced that it would accelerate aspects of the implementation of the stabilization and growth phase of its plan. Revlon recorded charges of approximately $100 million in the fourth quarter of 2002 and currently expects to record additional charges not to exceed $60 million during 2003 and 2004.”

It doesn’t take much insight to conclude that Revlon wants to jump to steps two and three without completing step one. After all, SG&A expense has drifted above gross profits in each of the last four quarters, and the company has failed to cut costs enough to turn a single profit in the last 20 quarters.  How can a company justify ramping up spending by $160 million when annualized interest expense already bests this amount?  Is Perelman taking Bush’s lead – hoping that everything somehow works out down the line because he is borrowing and spending so much today?

Suffice it to say, and after yet another quarterly disappointment in both revenues and losses (Sept 30, 03), Revlon has $34.5 million in cash left on its balance sheet. Baring a SPECTACULAR turn of events, this cash combined with the roughly $20 million Revlon has left to draw on its credit lines, should mean that the company is broke by the end of the year…

Will Perelman pull out his check book to cover the company’s near term short fall, and will he battle with lenders in the years to come to try and keep Revlon a going concern? According to sources, the answer is yes:

“Mr. Perelman's closest adviser, Howard Gittis, says bankruptcy is not a possibility. "Under no circumstances is Revlon going to file for bankruptcy,"”  NY Times. August, 2003.




Of Bezos and Perelman

While Bezos is undoubtedly a believer in Amazon, his constant selling of Amazon shares – supposedly undertaken for ‘diversification’ purposes – is a constant reminder that the company’s stock price is not attractively priced.  By contrast, Perelman – who was demanding too much money when Revlon was on the block in 1999 – is content with believing he can turn any losing enterprise around.

Perelman, like Bezos, has the ability to put a smile on a seemingly endless string of losses.  However, Perelman, unlike Bezos, will need to inject or find fresh capital in order to keep his company alive…

There comes a point when owning an equity stake in a company does not outweigh the advantages of filing for chapter 11. Quite frankly, if Perelman controls the debt – say at 35-40 cents on the dollar – he can acquire greater control of Revlon’s cost structure.

With a market cap of $169 million betting that Perelman keeps his equity dreams alive may be wishful thinking…the stage it has been in since the late 1990s.


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