I've Found This Takeover King's Next Billion-Dollar Play

Joseph Hogue's picture

Wednesday, July 26, 2017 - 2:30pm

by Joseph Hogue

I watch insider transactions closely, following the big selling just as much as the buying. The conventional wisdom is that the actions of these investors can tell you when to buy or sell a company. After all, directors and executive management are ALWAYS trading on insider information.

Much of the time, scanning through recent Form 4 statements, the SEC document required when insiders buy or sell shares, is a big yawn. It's either too small an amount to mean anything to the overall ownership or simply the insider adjusting their total wealth held in the company. But every once in a while you come across something that makes you sit straight up: An insider with other intentions. Finding these instances gives investors the chance to piggyback on the insider trades before the market catches on.

I think I've found one of those trades studying the insider buying from one of Wall Street's most famous, or infamous, takeover kings. He's turned his ability to turnaround struggling companies into a $12 billion fortune, making him the 36th richest person in America.

Now it looks like he's focused his aim on a company he's already tried to buy out before.

This Top Director is Quietly Buying Up Shares
Ronald Perelman was already doing million-dollar deals as a freshman at University of Pennsylvania's Wharton School in 1961. He flipped his first major purchase of the Esslinger Brewery in three years, selling it for $1 million and netting a $200,000 profit. 

Since then, he's done dozens of deals in industries ranging from biotechnology to military equipment and cosmetics.

One of his most famous deals has been the 1985 hostile takeover of Revlon (NYSE: REV) for $1.8 billion. It's one of the few holdings he's held on to… and now it looks like he may want it all. 

A recent SEC Form 4 (Statement of Changes in Beneficial Ownership) filed on June 23 reveals ownership of 43,109,460 shares in the company. Perelman has purchased 2.4 million shares in 18 transactions since May for an average price of $20.65 per share. 

Perelman already owned the majority of shares directly and through his holding company, but clues around the purchase lead me to believe there is something more.

The share purchases are the first since 2009. The 2009 purchases were ahead of a failed transaction to take the company private after a court ruled that Perelman was not acting fairly with other shareholders.

The most recent purchases give him 83% of the company for a total of about $947 million. Revlon shares have struggled since last year's Elizabeth Arden acquisition but could be about to pop on an operational rebound or another takeover attempt.

Revlon Rebounds Or Perelman Seeks Strategic Alternatives
Shares have sunk by more than a third since last year's $420 million acquisition of Elizabeth Arden as the company struggles to integrate the purchase and return to profitability. Sales have increased 30% since the acquisition, but operating costs have jumped as well. 

The company's operating margin has plunged from 11.3% in 2015 to just 3.1% over the trailing 12 months. Management believes it can grow sales to $3 billion, an increase of 20% on trailing revenue, from the acquisition and realize cost synergies of $140 million for an EBITDA of $560 million. 

That EBITDA goal is more than three times the $169 million booked over the last year.

Perelman revealed he was exploring "strategic alternatives" for the company last year just before bringing on Fabian Garcia as its new CEO. This could mean that if Garcia cannot turn the company around and make the Arden acquisition work, Perelman may again attempt to take Revlon private.

Revlon has $122 million in balance sheet cash, just over 10% of its market cap, and over $800 million in receivables and inventory. 

Even at a $1.1 billion market cap, Revlon is a relatively small company and not well covered by analysts. There's only one equity analyst that covers the shares and I haven't seen any headlines about Perelman's massive stock purchase. 

I see one of two scenarios for the company. Either it improves operational performance, realizing acquisition synergies and increasing net income, or Perelman again tries to take the company private for a turnaround.

Shares trade for just 0.5 times trailing sales, well under the average 2.8 times industry average and under the company's own 0.8 multiple over the last five years. A return to $35 per share, where it traded for much of 2016, would represent a 60% increase in the price but still just 0.74 times sales. 

Risks To Consider: Shares could remain under pressure as the company integrates the Arden acquisition or until Perelman makes another attempt to take it private.

Action To Take: Ronald Perelman may not let Revlon struggle much longer before he attempts to buy out shareholders. Position ahead of a potential takeover offer or the company's operational rebound.

Editor's Note: When a group of millionaires and billionaires gather in one place to reveal their favorite investment, you need to know about it. So our Chief Investment Strategist, Jimmy Butts, investigated what they discussed, including where they recommend you put your money in 2017... His full findings here.

Joseph Hogue does not personally hold positions in any securities mentioned in this article.
StreetAuthority LLC does not hold positions in any securities mentioned in this article.