Regis Takes a Haircut, Albert-Culver Ready For a Makeover (ACV, RGS)

Last night Alberto-Culver's (NYSE: ACV) board voted unanimously to terminate a sale of its Sally Beauty and BSG operations to Regis Corp. (NYSE: RGS). Regis also terminated the pact in return. Regis is saying this will force the $50M termination fee, but these problems cited for the deal cancellation "may" not make that $50M payment a sure bet. Usually these termination fees have to be paid at least in part, but we'll see.

ACV cited the following reasons for voting against the deal: Two consecutive earnings shortfall announcements since execution of the merger agreement, significant revisions to Regis' financial forecasts, uncertainty about its fiscal 2007 outlook and differences over operating and governance approaches.

Shares of RGS were up almost $1.00 at the open this morning, but this made no sense at all. This merger was never an easy one to digest because this was going to make ACV the majority shareholder with a 54.5% stake in a deal originally worth approximately $2.2B to $2.6B. GS has never been a Bait Shop member here internally, and it would probably take a more significant haircut than this for it to be looked at. RGS stock has been performing dismally on all of the negative developments, and despite the claim over a merger termination fee this just continues to add to the malaise for RGS shareholders. RGS is even expensive if you consider it is a hair salon operator with a current 25 P/E ratio; but it does trade at a much cheaper forward multiple of approximately 16.

This company would theoretically be the right fit for a private equity firm or another services-related company, but the current price and underlying issues may make this improbable for now. If it traded at much lower multiple at a 12 or 15 P/E this might make more sense, but "IF, IF, IF" is exactly an endorsement. You have very fixed costs, somewhat predictable stable cash flows through time, low R&D expenses, steady demand for the service, and an easy to understand business; but the thing to consider is who is running this and what else ACV may be inferring. The company operated 10,879 system-wide North American and international salons, 24 beauty career schools, and 90 hair restoration centers, as of June 30, 2005. Despite this many salons, there are really no barriers to entry and probably half of the consumer base probably won't lose any sleep if they get their hair cut at a different salon. This makes the underlying value a toss up as far as RGS is concerned.

Normally with a basic service industry stock trading 25% off its highs it would start to garner some interest from other buyers, but something really feels off here. If ACV thought the RGS shares were bottoming out they would have probably tried harder to close the deal and just ask for contingencies, but this feels like they are saying more bad things may be coming. Who knows if that is really the case, but that is how it feels.

The one to watch here may be Alberto-Culver (ACV). They have already signaled that they would sell the units and a quasi-price already seems established. This would make a spin-off probably more than possible and it may even portend a "Backdoord Play" for a future deal. ACV also has to do something with this unit because right now it manufactures shampoos and other products, but also sells competitors' brands through its Sally retail chain. Those stores would have become part of Regis in the deal, but now Alberto still remains both a vendor for and competitor against other manufacturers.

So far the street is rewarding ACV for dumping the deal with RGS. ACV was trading up 3.4% and depite trading up initially RGS is now down another 1.9% this morning.