REVISITING REVLON: BEAUTIFUL VALUE IN AN UNATTRACTIVE MARKET

Revlon is a rare opportunity to buy a nearly recession-proof franchise at a significant discount to

intrinsic value, with recent price weakness providing a good entry point, and the catalyst of a large,
synergistic acquisition, and a new CEO, to fuel earnings growth.
Revlon is a global cosmetics and beauty care products company, founded in 1932, with products sold
in over 100 countries across six continents. Since founder Charles Revson first coined the phrase
that the cosmetics industry was "selling hope in a jar," Revlon has been an iconic brand, an enduring
business with a high profit margin, steady recession-resistant demand, and predictable free cash flow
over time. It sells its products through the mass retail channel and holds leading market positions in
many product categories in the U.S., as well as in foreign countries like Australia, Canada and South
Africa. 45% of sales are from outside of the U.S.
On August 5th Revlon announced their re-acquisition of The Colomer Group (owner of CND Shellac
gel nail polish, American Crew mens hair products, and Revlon Professional hair salon products) for
$665 million in cash. Financed with bank debt currently costing 4%, the acquisition reunites Revlon
with a business group they have owned in the past (Revlon sold the business for $315 million in
2000 when they needed to deleverage their balance sheet). For the $665 million Revlon is paying,
they get a business that did $510 million in sales for the last twelve months ending June 2013 (61%
international), and $72 million in EBITDA (14.1% EBITDA margin). So it appears they paid 9.2x
EBITDA for the deal, a low multiple for such high quality brands in this industry. They expect to
incur a further $40 million in costs over the next two years to extract an ongoing $25 million in
annual run rate synergies by 2015, at which point the total cost would be $705 million for a business
doing $97 million in EBITDA (assuming no sales growth), or only a 7.3x EBITDA multiple. Net debt
will increase to about $1.8 billion, and net debt/EBITDA will increase to about 4.9x from 4.0x prior,
but for a business that grew EBITDA and free cash flow straight through the Great Recession, that
relatively high leverage ratio is tenable.
Revlon's newly appointed CEO, Lorenzo Delpani, has been CEO of The Colomer Group since 2004,
and led the company through a period of above average growth and innovation, most importantly
introducing in May 2010 the CND Shellac gel "no-chip" nail polish technology which was
revolutionary in the nail polish industry, sparking much of that sector's high growth over the past
three years.
So what is Revlon worth?
Assuming no sales growth in 2014 (in deference to recent weakness in the mass market for color
cosmetics industry-wide), and accepting Revlons projection that they will realize $13 million of the
$25 million in annual cost savings in 2014, its reasonable to assume Revlon can produce sales of
$1.94 billion in 2014, $375 million of EBITDA (19.4% EBITDA margin), and $150 million of free
cash flow.
At $40 per share, Revlon would be trading at a total enterprise value (TEV) to EBITDA multiple of
10.7x, and market capitalization to free cash flow multiple of 14x.
At $50 per share, the TEV/EBITDA multiple would be 12x, and mkt. cap./ FCF would be 17.5x. So
we think Revlon should be trading around $40 now (58% higher than current price of $25.29) with a
private market value of $50 (98% upside from $25.29). Estee Lauder (EL $74.32) trades today at
13x EBITDA. LOreal (OR FP EUR 124) trades at 14.9x EBITDA. And LOreal paid 14.6x EBITDA to
buy out Maybelline in 1996. So our expectation that Revlon trade somewhere between $40 (10.7x)
and $50 (12x) shouldnt be hard to imagine.

Current
Price

Market Cap.

TEV/
EBITDA

EBITDA Margin

P / FCF

$25.29

$1.4 bil.

8.8x

19.4%

9.3x

$74.32

$28.8 bil.

13x

19.2%

24.6x

LOreal (OR FP)

124.00

$101.7 bil.

14.9x

20.6%

25x

Avon Products
(AVP)

$17.58

$7.6 bil.

8.7x

11%

19x

Elizabeth Arden
(RDEN)

$38.44

$1.1 bil.

9x

12%

14x

Coty Inc. (COTY)

$16.19

$6.2 bil.

9.5x

18.1%

14.5x

Company
Revlon Inc. (REV)

Estee Lauder (EL)

(prices as of 11/25/13. EBITDA & FCF based on calendar year 2014 estimates.)
Why the stock recently dropped:
On October 24th, Revlon, Inc. announced results for the third quarter ended September 30, 2013
which were a bit weaker than the estimates of the only brokerage firm (BMO Capital Markets) that
follows the stock. But that was primarily due to adverse foreign currency effects, without which
Revlon's overall Q3 sales would have been +1.1% Revlons domestic sales in Q3 (-3.2%) were in-line
with Elizabeth Arden (-3%) but held up better than Coty's (-10%) and Avon's (-19%) in a recent
industry-wide slowdown cited by all of the U.S. mass-market cosmetics players in their Q3
conference calls.
Ron Perelman effect:
78% of Revlons shares are owned by Ron Perelman, the billionaire investor who has controlled the
company since 1985 and who has occasionally tried to take advantage of minority shareholders in
companies he has controlled over the years. In April 2009, when the stock was trading at $3.00,
Perelman attempted to force a mandatory exchange of common shares for a preferred stock to be
issued with a $3.74 face value and 12.5% yield. Revlon couldnt get a fairness opinion and
shareholder Vern Mercier sued to stop the deal. Revlon settled by the making offer voluntary. The
preferred stock value was then raised to $5.21 per share and increased yield to 12.75%. Nearly half of
the minority shareholders accepted that revised exchange offer. Shortly after those who accepted the
deal got their preferred stock in October 2009, the common stock soars from $5.50 to nearly $20 on
strong earnings report. Lawsuits by those who accepted that deal were then settled in 2012.

It's unlikely that Perelman would try once again to buy-out minority investors at a low price, given
the past litigation settlements and SEC fines incurred, and the possibility of having to appear in front
of the same judge in Delaware. Yet, the fear associated with being a minority investor in a Perelmancontrolled entity is likely a significant factor in the current valuation discount on REV shares. That
fear looks overdone to us, especially since Perelman has historically been a seller of assets in M&A
environments such as now (a seller's market); witness his IPO of Revlon in 1996 on the heels of
Maybelline's takeover (at 14.6x EBITDA) by L'Oreal, and his sale of TV station owner New World
Communications Group for 17x EBITDA to News Corp in 1997.
Potential acquirers:
If Perelman, nearing 71 years old, decides to sell, a bidding war could easily erupt between likely
buyers such as Unilever, Procter & Gamble, and possibly Reckitt Benckiser (which tried and failed to
buy Maybelline in 1995/1996), among others. Revlon would nicely fill gaps in those companies
product offerings.
Conclusion:
REV currently trades at a significant discount to its intrinsic value. The companys highly accretive
acquisition of The Colomer Group, and the appointment of a new CEO, bodes well for the companys
growth prospects, and further enhances its potential value.
Risks:
Most of Revlon's debt is floating rate, so they are vulnerable to a sustained rise in interest rates.
Competition is their industry remains fierce. Perelman remains Perelman.

ChristopherP.Mittleman
ManagingPartner

MittlemanBrothersLLC
188BirchHillRoad
LocustValley,NY11560

phone:5166866200
mobile:9179511782
fax:5166866207
www.mittlemanbrothers.com

*Past performance is no guarantee of future results. This is not an offer to buy or sell any
securities. Partners and employees of Mittleman Brothers, LLC own shares in Revlon, Inc. (REV).