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Revlon

Firms for Sale (Note: These slides were taken from the internet by a student, but at this point I don’t know the source. I simply want to acknowledge that they were prepared by someone other than me.). Revlon.

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Revlon

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  1. Firms for Sale(Note: These slides were taken from the internet by a student, but at this point I don’t know the source. I simply want to acknowledge that they were prepared by someone other than me.)

  2. Revlon • Pantry Pride (Perelman ) wants to acquire Revlon for about $45 per share. How and Why? • Junk Bond Financing • Because Perelman thought the breakup value of Revlon would be between $60 and $70 per share.

  3. Revlon • What were Revlon’s first defensive tactics? • The issuance of Note Purchase “Rights” (redeemable by the board that permitted any shareholder but an acquiror of 20% or more to exchange one share for a $65 note of anyone acquired 20% or more for something other than $65 cash per share.

  4. Revlon • What were Revlon’s first defensive tactics? • The self tender for 10 million shares each in exchange for a “Note” of $47.50 and a $10 share of Preferred Stock. • The Notes contained covenants against future debt unless approved by Revlon’s independent directors.

  5. Revlon • Did these early defensive tactics works? • Yes and no. Pantry Pride raised its bid to above $50 but did not go away.

  6. Revlon • What did Revlon do next? • Agreed to a facilitate a buyout by Forstmann for $53 per share. • Forstmann would assume Revlon’s $475 million debt from the Notes issuance. • Rights canceled for this (or better) offer. • Revlon’s independent directors would remove the debt covenants of this (or better) offer. • Forstmann would breakup Revlon.

  7. Revlon • What happened next? • The value of the Notes began to fall and Note holders threatened litigation. • Pantry Pride raised its offer to $56.25 subject to nullification of the Rights, removal of the Note covenants, and seats on Revlon’s board.

  8. Revlon • What was Revlon’s response? • Fortification of the deal with Forstmann for $57.25 per share using: • A “crown jewel” option for Vision Care and National Health Laboratories, an option worth between $100M and $175. • A $25M breakup fee. • A no-shop agreement.

  9. Revlon • How did Revlon defend this deal? • Forstmann offered $1 more per share. • Protection of Note holders. • Forstmann’s financing was in place. • Forstmann demanded an immediate answer.

  10. Revlon • What was Panty Pride’s next move? • Sued to enjoin the defensive tactics. • Raised its offer to $58 per share contingent on rejection of these tactics.

  11. Revlon • What standard did the court apply? • Board must show that it “had reasonable grounds for believing there was a danger to corporate policy and effectiveness, a burden satisfied by a showing of good faith and reasonable investigation. “Page 771. • Response must be “reasonable in relation to the threat posed.” Id.

  12. Revlon • In what respects did the court support Revlon? • The Rights were a good faith and reasonable response to Pantry Pride’s initial low bid, and became moot as the price rose. • The exchange offer too, was a good faith reasonable response to a low offer.

  13. Revlon • Why then did Panty Pride win? • “The Revlon board’s authorization permitting management to negotiate a merger or buyout with a third party was a recognition that the company was for sale. The duty of the board had thus changed from the preservation of Revlon as a corporate entity to the maximization of the company’s value at a sale … .” Page 773.

  14. Revlon • Why Pantry Pride won. • Put simply, the court blamed the Revlon board for attempting to stop the auction too soon, using the crown jewel option, breakup fee, and no-shop clause.

  15. Revlon • What of the board’s purported reasons regarding Forstmann’s higher price (combined with Forstmann’s threat to withdraw) and better financing? • Trivial, both.

  16. Revlon • What of the board’s contractual or other interest in protecting the Note holders? • Fiduciary duty runs to shareholders. • “A board may have regard for various constituencies in discharging its responsibilities, provided there are rationally related benefits accruing to stockholders.” Page 774

  17. Revlon • Why did the court think the board favored Forstmann? • Fear of Personal liability on the Notes, which Forstmann was going to support. • But personal liability seems a stretch, as may Forstmann’s ability to protect the Notes, which dropped in value on notice of the Forstmann merger. • Personal animosity might be a better fit.

  18. Revlon • An important prelude to future cases: • “Favoritism for a white knight to the total exclusion of a hostile bidder might be justifiable when the latter’s offer adversely affects shareholder interests, but when bidders make relatively similar offers, or dissolution of the company becomes inevitable, the directors cannot… [play] favorites … .” Page 775

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