Raiders Of The Lost Corporate Ark - Revlon

Jan. 25, 2019 1:02 PM ETRevlon, Inc. (REV)7 Comments6 Likes
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Summary

  • Revlon is controlled by a single insider for 30 years billionaire Ronald Perelman.
  • Perelman has developed in his career a method of hostile takeovers that dates far before Revlon.
  • Due to a rule, if he is able to get 90% of Revlon he'll get voting rights of all 100%.
  • The float (available shares for purchase) is low 2.29 M, almost all of which are held short.
  • Recently, Barna Capital purchased a 2% stake, putting the institutional control above 10.1%, making a Perelman takeover impossible.

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Revlon (NYSE:REV) is an American multinational cosmetics, skin care, fragrance, and personal care company founded in 1932 and based in New York City. That is commonly known; it is a brand name.

However, what you may not know unless you are a securities attorney is that Revlon is the cause of one of the largest and most significant corporate securities decisions of a generation regarding corporate takeovers. Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., 506 A.2d 173 (Del. 1986) was a landmark decision of the Delaware Supreme Court on hostile takeovers:

The Court declared that, in certain limited circumstances indicating that the 'sale' or 'break up' of the company is inevitable, the fiduciary obligation of the directors of a target corporation are narrowed significantly, the singular responsibility of the board being to maximize immediate stockholder value by securing the highest price available. The role of the board of directors transforms from 'defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders at a sale of the company.' Accordingly, the board's actions are evaluated in a different frame of reference. In such a context, that conduct can not be judicially reviewed pursuant to the traditional business judgment rule, but instead will be scrutinized for reasonableness in relation to this discrete obligation.

This case is so significant in securities and corporate law that it has been cited 3,640 times:

And what's interesting is that the guy who caused the case - Ronald Perelman - is still at the center of a shareholder dispute that started in 2013:

(Reuters) - The Securities and Exchange Commission charged Revlon Inc with misleading shareholders about a transaction with its controlling shareholder, billionaire Ronald Perelman, and the cosmetics company agreed to pay a fine of $850,000. Revlon did not admit or deny wrongdoing in settling civil charges that it withheld information that could help helped shareholders evaluate the fairness of a 2009 'going private' transaction with Perelman's MacAndrews & Forbes Holdings Inc. The firm at the time owned 58 percent of Revlon's Class A stock and all of its Class B stock, and held 75 percent of its voting power, according to the SEC. Perelman is Revlon's chairman. 'Going private transactions create opportunities for shareholder abuse and can have coercive effects on minority shareholders,' said Antonia Chion, an associate director in the SEC enforcement division. 'By erecting informational barriers, Revlon kept critically important information from its board and, in turn, misled investors.'

This culminated in a 2017 buying spree, as noted by Bloomberg.

Before digging deeper into the history here, what prompted this story is the recent purchase of about 2% of Revlon by Barna Capital, which has created a majority of the minority of 10.1%. That means that Perelman would need the consent of the 10.1% owners to take control of Revlon completely.

Basically, Barna Capital has blocked the modern Gordon Gekko from a hostile takeover that would have who knows what kind of end - nothing good for shareholders. This action has freed the shareholders of the control of Perelman and given them rights just like in any other public company. You can see the other shareholders here:

Source: Marketscreener.com. (Barna is not listed because shares were bought in small blocks.)

We need to inject a small side note - due to a rule specific to Revlon, if any owner controls 90% of the company it is the equivalent of controlling 100%.

Now, for some background on Ronald Perelman: He is a Wharton grad with a history of corporate raids and has been accused (but never convicted) of Greenmail multiple times, starting in 1986:

He was first accused of greenmail in late 1986 during a run at CPC International when he bought 8.2% of CPC at around $75 a share and indirectly sold it back to CPC through Salomon Brothers a month later at $88.5 a share for a $40 million profit. Both CPC and Perelman denied it was greenmail despite appearances to the contrary, including what looked like an artificial price increase by Salomon shortly before they sold Perelman's shares.

... Another accusation of greenmailing levied against him was the best-known and stemmed from his attempt to purchase Gillette in November 1986. Perelman opened negotiations with a bid of $4.12 billion. Gillette responded with an unsuccessful lawsuit and public insinuations of insider trading. Perelman accumulated 13.8% of Gillette before he made what he would later call the worst decision he ever made and sold his stake to Gillette later that month for a $34 million profit.

These are just the stories that went on in public; it's possible Perelman has been involved in tons of backdoor deals no one will ever know about. But he has made a business out of it, a modern version of the character from Oliver Stone's "Wall Street" Gordon Gekko. "Greed is good" was the slogan in the 80s and it was cool to buy a company and sell the parts for scrap for a nice profit. The 80' has come and gone -well, for most of the world - but it seems Perelman is still living in this time.

When in any market you control the majority of available assets (in the case of stocks, that's the float), the possibility is there for manipulation. And according to research, opportunity creates the thief. That holds true in crypto as well as U.S. publicly traded securities. But because the U.S. has an extensive history of fraud and manipulation by unsavory actors, rules and systems are in place that make fraud almost impossible. It didn't turn Americans into good people - it made financial fraud difficult (impossible).

There's another part of this story - Perelman has put his own daughter in executive positions at the company, as well as other controlled persons. He knows how the game is played he practically invented it. There are books written about it, such as Bloodsport: When Ruthless Dealmakers, Shrewd Ideologues, and Brawling Lawyers Toppled the Corporate Establishment:

Source: Bloodsport by Robert Teitelman, 2016

It's about form, not essence. But to what end? What is his endgame? To make money, of course - but there is a deeper play here with Revlon and we're going to get to the bottom of it.

Available Borrows

Every day at Interactive Brokers and other major brokers, the borrow of available shares for short goes up to 100k available so short sellers get the borrows they need. Barna, Mittleman, and other owners of the majority of the minority have confirmed to us confidentially that they do not lend out shares. Because there are 2.5M shares short, there simply aren't enough shares to borrow to short, would someone want to. There seems to be a big short seller, who has developed an algorithm to do the shorting for them.

Iborrowdesk.com shows available borrows on any stock. For readers who aren't familiar with shorting, you have to always borrow stock if you are going to sell short - and there are limited quantities. Hedge funds, mutual funds, and other long term investors will loan their stock out for this purpose for a fee.

Source: REV on iborrowdesk.com

Every day about 100k shares appear for borrow, and the stock starts moving lower. Similar story at Fidelity. Then those shares no longer appear to be available the next morning, but in the afternoon about 100k appear again and the stock starts moving lower again. There is no float. Barna Capital shares cannot be borrowed and Mittleman Brothers say they don't lend out their stock either. 2.6 million shares are shorted now. That covers the whole "borrowable" float. Where do these shares appear for borrow from daily? A huge short seller, perhaps Jim Chanos? We don't know, and we won't know until after the fact. But the point is that it doesn't matter who the short seller is - the point is that there is a short seller and this can cause a squeeze.

About 2 million shares out the remaining float is in ETF. So that basically is not tradable as they only rebalance their portfolios and do not trade actively. That lease roughly 500k shares tradable period, with 2.6 million already shorted. Why is that important? This is building steam for a short squeeze, like an overheating Nuclear Reactor that is going super critical.

Moxx Report

The following report was released in June, but it seemed to have gone mostly unnoticed:

Source: MOXX Report

Source: MOXX Report

The report is worth a full read that explains much of the backdrop here, especially outlining that Perelman is a takeover/turnaround mastermind who has been named by Forbes magazine one of the greatest living business minds of all time. Since Perelman controls so much of the situation at Revlon, a look at his business career is worth a dive.

Trading Anomalies - A Potential Short Squeeze?

Here are the facts: Options traders are betting on a big bet in Revlon. The data is all there. So here is what we are saying: Revlon stock is a candidate for a huge short squeeze. That's our opinion, based on analysis of the data. We can be wrong. Based on the borrow info above, any run up in the price could cause whoever the short seller is to cover in a panic as happened recently to Tilray (see comparisons to Tilray later in this article).

Insider Activity Says It All

According to Nasdaq, there is really only one significant insider in Revlon and that's Perelman, Ronald O.:

Source: Nasdaq.com

If you have looked at stock data for most of your career, you've probably never seen only a single buyer on this list. There are a few other buys from insiders on the following pages, this is from page 1 - you can see Perelman is consistently buying. What we can say for sure is that it's unique that in a publicly traded company a single shareholder owns 85% of the available shares.

A Quick Look at the Revlon Rule

The irony about this case is that the Revlon Rule (some call it "Revlon Duty") that is used as a legal and ethical benchmark for decades, is based on RP's previous hostile takeover attempt at Revlon that ended up in Delaware's chancery court. As per Investopedia:

The Revlon rule is the legal principle that a company's board of directors make a reasonable effort to obtain the highest value for a company when a hostile takeover is imminent. The Revlon rule involves a narrower interpretation of a board's fiduciary duty, which typically is limited to protecting a company from external threats; under normal conditions, a director is not required to negotiate with any hostile bidder. The case that created the Revlon rule was Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., and was tried before the Delaware Supreme Court.

The American Bar has volumes of documents about this topic, some of which can be accessed publicly here.

The rules preventing Perelman from an outright hostile takeover are based on his own history in this company - in other words he's playing the game he invented. At the end of the day, his likely scenario is that he just wants to own the whole thing, and pay as little as possible. If all the politics and corporate PR show can save $10 million or more - who knows how much - then certainly it's worth it.

Here's a five-year chart for some perspective on where REV is at:

ChartREV data by YCharts

Scenario 1 - Short Squeeze Drives REV Higher

The short interest is higher than the float - this is a very rare situation. We know where the short sellers has borrowed his stock for sure (wink, wink). But what we don't know is if the short interest is Perelman himself. Why would he short his own stock? To control and manipulate the price, of course. But when those shorts cover - whoever they are - it can rocket the stock higher due to the small float.

Source: Yahoo Finance

Scenario 2 - Perelman Dumps His Interest

It's unlikely that Perelman would sell and create a situation where he would lose money. In what he called the "worst decision he ever made in his life" with Gillette Razor company, he made $34 million (this was in 1986; much more in today's dollars).

As the majority owner he has an interest to protect himself. For Perelman, selling may mean finding another single buyer or making use of some press to unload Revlon to a larger company like Berkshire Hathaway (BRK.A). We are not suggesting that Berkshire Hathaway is a potential takeover candidate, we are simply stating that if Perelman wanted out of Revlon he would find a takeover candidate, perhaps someone from Asia like TenCent that may pay a premium over value just to own an American brand. That's a way out for him. But it's not clear he wants out - this is just an elaboration on a potential scenario.

Analysis of 2 Scenarios

In both cases, Revlon shares would go higher. Either due to a short squeeze, a sale to a larger firm - it would send the shares higher. The brand is a stable brand that doesn't seem to be going away anytime soon, so it looks as if Revlon should be called "Revlong" - game on.

This is actually an exhaustive topic that is an ongoing situation that can only be characterized as a drama, with Perelman playing the lead role as well as writing the script. So let's pause the drama for a moment and take a look at the trading anomalies.

Trading Anomalies in Revlon

Take a look at this Level2 window for REV in which you will see a wall of offers:

barna revlon level 2

Source: Barna Capital

As you can see, there are offers on multiple exchanges, NYSE, BATS, EDGA, ARCA, and BYX - all at the same price. At another point in time, you can see even more offers:

level 2 revlon manipulation evidence

Source: Barna Capital

To get to the bottom of this we interviewed Egor Romanyuk, Chief Strategist of Barna Capital. He told us:

Today is one of those days. Right off the open an algo starts selling 100 shares into the bid. The spread is 3%. If I place a bid higher than last sale, let's say 500 shares. It will sell me 500 shares. And will sell 100 shares at whatever bid is lower than last. It's just moving share price lower. It's only job. And here's one more thing. When the algo buys stock, the 15k algo buys move the stock from 50 cents to a dollar. When I buy 15k shares, the stock usually goes down. So I'm working against a short.

Source: Barna Capital

If you think this is an anomaly, let's look at the Level 2 from the previous day:

revlon manipulation

You can see on the screen there is a wall of sell orders. But the float is so small, who can be the seller? We don't know for sure, as data is not transparent; however, the point is there is a short interest here. That short interest - caught in a squeeze - could be forced to panic cover driving REV through the roof. That's how a short squeeze by definition works.

Others Have Noticed

We'd like to say that we have done groundbreaking research on this, but we are not the first to notice that Revlon is a potential short squeeze. InvestorPlace.com authored an article titled "20 Stocks With Short Squeeze Potential" in which Revlon is near the top of the list:

A short squeeze may be the only way out for cosmetics maker Revlon, which looks to be in serious trouble. Sales are falling, with a 9% constant-currency decline in Q1 after a 6% decline in 2017, excluding the contribution from acquired Elizabeth Arden. Profits are plunging, with Adjusted EBITDA dropping nearly 38% last year, and a whopping 87% in Q1. Meanwhile, Revlon has a concerning amount of debt outstanding - and even its bond prices are signaling a clear risk of bankruptcy. The company's 2024 bonds trade at just 55 cents on the dollar, and yield a whopping 19.3% to maturity. A new CEO may spark a turnaround, but if she doesn't, the shorts will celebrate, as Revlon stock could be headed for zero. Majority shareholder Ron Perelman could have something to say about that, but he'll need to show some real improvement in the business first.

And right here in an SA blog, Revlon is compared to Tilray:

We need to dig deeper into the contracts with bondholders, who often are on the losing side of a deal that Perelman makes, which might be positive for shareholders but negative for bondholders. For now, even this article seems exhaustive, but at the same time only tells part of the story. It seems that a short squeeze is imminent. Stay tuned.

This article was written by

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Disclosure: I am/we are long REV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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