The old adage goes, "You don't know what you got 'til it's gone." This seemed to prove true for cosmetics company Revlon (REV). The company reacquired The Colomer Group, which had sold to CVC Capital over 13 years ago. The acquisition creates a new business channel for Revlon and will also greatly help the company's geographic diversification.
Revlon is paying $660 million to acquire The Colomer Group. Revlon sold the company for $315 million 13 years ago to CVC and a former Revlon executive. The deal will be financed by new debt financing from Citigroup. The acquisition price is a rather large one for a company with a market capitalization of $1.3 billion.
The Colomer Group brings a great portfolio of consumer and professional cosmetics to Revlon, who has seen declining sales as of late. Among the brands acquired are: Creative Nail, Shellac Nail, American Crew, Natural Honey, Llongueras, and Crème of Nature. Colomer also licensed the Revlon name for several professional brands, which creates immediate cost synergies and distribution opportunities.
It's hard to believe that a company like Revlon is not involved in the professional care market. With strong brands like Revlon, Almay, Sinful Colors, Pure Ice, Mitchum, Ultima II, Gatineau, and Charlie, Revlon has been able to capture strong market share in several beauty product categories. However, professional care isn't one of them. Revlon should be able to sell some of its other products through its new professional customer base.
More importantly, The Colomer Group comes with growing sales in emerging markets. In 2012, 50% of the company's sales came from Europe, the Middle East, and Africa. The United States accounted for 40% of The Colomer Group's sales, while the additional 10% came from other world markets. In comparison 57% of Revlon's 2012 sales came from the United States.
Revlon lays out the following highlights of the acquisition:
· Accretive to cash flow and earnings within first year
· Complements core business
· Expands distribution into new channels
· Meaningful cost synergy opportunities
Those new strategies will complement Revlon's growth plan, which consists of:
· Build our strong brands
· Develop our organizational capability
· Drive our company to act globally
· Pursue growth opportunities
· Improve our financial performance
In fiscal 2012, Revlon sales increased 3.2%. Excluding foreign exchange impacts, sales would have been up 4.8%. Sales in the most recent reported second quarter declined. Here is a breakdown of sales by region:
As you can see, the most recent fiscal quarter saw declines in every geographic region. The company's lowest sales region of Europe/Middle East/Africa saw the largest decline in fiscal 2012. If you remember from above, these three regions are one of The Colomer Group's key strengths. Look for this trend of declining sales in this particular region to turn around when the acquisition closes in the fourth quarter of fiscal 2013.
Along with the financing from Citigroup to fund the acquisition, Revlon will open new credit to refinance old debt. This is one area being missed by most analysts, but is significant. Analysts see the company posting earnings per share of $1.65 in fiscal 2013. However, one quarter of sales from The Colomer Group and lower interest rates could significantly impact a possible earnings beat on the year. In fiscal 2014, earnings per share are expected to increase to $1.80 billion. That number should be raised as the new brands are integrated and I see a more realistic target above $2.00. Analysts see sales declining 2.0% in fiscal 2013 and increasing a slight 1.1% in fiscal 2014. Revlon will be hoping The Colomer Group changes that prediction and leads to increased sales.
Shares of Revlon were up on the news earlier in the week, but have since fallen to the $25 level. After several investors took profits, new investors should be ready to enter this exciting play. Revlon has many upcoming catalysts with the acquisition, cost synergies, emerging market sales, professional sales, and new debt restructuring.