Parlux Shareholders: A Buyout Offer in the Offing?

by: Thomas Murphy

Over the last several years, I have periodically mused through a series of articles that I thought shares of Parlux (NASDAQ:PARL) were mispriced given the underlying book value and the growth potential of newly licensed brands. I continue to hold that view.

Today, despite economic conditions, the difference between the share price of Parlux and its book value and future potential has never been greater. Book value continues to sit around $5.50 per share and the pipeline of new or upcoming fragrances has grown to include such notable names as Jessica Simpson, Josie Natori, Queen Latifah and Marc Ecko. Given the level of the disconnect between price and potential, I would be surprised, no stunned, if some party did not take advantage of the situation and propose to acquire Parlux. In reviewing various possibilities, Mr. Glenn Nussdorf quickly rises to the surface as perhaps the most viable candidate.

It hardly seems that February 5, 2009 will mark two years since Mr. Nussdorf reached a settlement agreement with Ilia Lekach and Parlux Fragrances. As long time shareholders of Parlux Fragrances certainly recall, Mr. Nussdorf acquired 10% of the outstanding shares of Parlux in 2006 for over $6.00 per share and sought to remove Ilia Lekach as CEO and block the sale of the Perry Ellis fragrance line. As it turned out, the Perry Ellis line was sold to for needed working capital but Lekach was removed as CEO. Neil Katz filled the CEO role on an interim in February 2007 before taking the role on a permanent basis in May 2007. Mr. Nussdorf still holds his 10% stake in Parlux today.

As part of the settlement agreement, Mr. Nussdorf and his affiliated companies were prohibited from making any offer to acquire Parlux for less than $11 per share for a period of two years. As I write this article, only days remain until the two-year minimum buyout offer limitation expires at the end of business on February 5, 2009. While I have not heard any rumors to support an upcoming buyout offer, I would not find a buyout offer surprising given the recent lows in the stock price.

As a sidebar, there are two other factors I consider interesting when looking at this possibility. First, I found it extremely interesting but likely coincidental that management scheduled a conference call with shareholders for the morning of February 5, 2009 to discuss the results of the quarter ended December 31, 2008. Secondly, the Nussdorf family's recent acquisition of a controlling stake in Perfumania seems to support continuing acquisitive desires of the Nussdorf family. The Nussdorf family acquired a controlling stake in Perfumania by selling ModelReorg (a company that was formerly wholly-owned by the Nussdorf family) to Perfumania in exchange for Perfumania shares.

In order to close an acquisition of Parlux, Mr. Nussdorf would have to acquire the remaining 90% of the outstanding shares of Parlux at a price at which a majority of shareholders (including Nussdorf) would support. As we have discussed at length, Parlux's strong balance sheet would provide much of the acquisition funding through use of its cash balance and through leveraging receivables, inventory and property and equipment.

Alternatively given the current stock price, the possibility that an alternative strategic or even financial buyer for Parlux emerges also increases. What is rather ironic is that just a few months ago with the stock price of Parlux hitting 52-week highs shareholders were happy and any discussion of a buyout below $11 was considered absurd. Today with share prices hitting 52-week lows, shareholders would likely accept a buyout offer at the 52-week high.

Given the disconnect between the share price of Parlux and its book value and future potential, I ask the question, "Is a Buyout offer in the offing for Parlux shareholders?" I find it hard to believe that someone else does not recognize the value in the hidden gem called Parlux Fragrances.

Disclosure: Long Parlux