“Next time you get the urge to invest in a company with a controlling shareholder, remember: Moguls usually get what they want. It is just what they do. Ronald Perelman, America's 18th-richest person, decided last year that he wanted to jettison the public shareholders of Revlon Inc., the cosmetics company he won in a 1985 takeover battle. Getty Images REASON TO SMILE: Revlon Chairman Ronald Perelman's bid to fix firm's finances allowed him to increase his holdings shortly before stock jumped. The Associated Press It was clear at the time that Revlon needed a financial fix. The company was delivering miserable results, and its stock price was stuck in the single digits, weighed down by fears the company couldn't roll over a big loan controlled by Mr. Perelman's own holding company, MacAndrews & Forbes. Mr. Perelman had a plan. Revlon's common shareholders would, in effect, directly subsidize the retirement of part of that MacAndrews & Forbes loan. Through a lot of paper shuffling, the shareholders would swap out their two-fifths ownership of Revlon common shares for a new class of preferred stock. Those new preferred shares would pay dividends and a one-time kicker after four years. In exchange, Mr. Perelman would loosen the loan terms and add the common shares that the outside shareholders held to his existing 58% ownership stake. There was one catch: None of this was voluntary. When Revlon's independent board When Revlon's independent board members convened to weigh the offer, they found it to be a crummy one. A phalanx of shareholder lawsuits also massed against Mr. Perelman. By early fall, the sides had crafted a new transaction under the watch of the Delaware courts. It significantly improved the terms of the deal for shareholders and squelched some of Mr. Perelman's more onerous demands. The pact received an important endorsement from Revlon's largest independent shareholder: Fidelity Management & Research Co. All the company's executive officers and independent directors also tendered their shares. Fidelity wouldn't comment. All seemed at peace on Oct. 8, when nearly half of the outstanding common shares were exchanged for the preferred stock. Mr. Perelman now controlled about 79% of Revlon's shares. Investors handed in Revlon stock that had fallen to as low as $2.58 a share and was then trading around $5. They received preferred shares that would expire in four years, paying out roughly $7.87 along the way. Then a funny thing happened. On Oct. 29, Revlon reported third-quarter results well above analysts' expectations. Revlon stock gained 43% in one day. It climbed even further in the ensuing weeks, to $10 by Nov. 1. The stock trades at about $15 today, nearly double the amount old common shareholders will get over the next four years. A few weeks ago, some shareholders reopened the previous lawsuit against Revlon and Mr. Perelman, saying he should have disclosed the company's improving fortunes. Securities laws set high disclosure standards for transactions involving a controlling shareholder. Dan Sternberg, a partner at law firm Cleary Gottlieb Steen & Hamilton, said in an interview that "the directors have a duty in Delaware of complete candor toward their shareholders. If it can be concluded that the anticipated results were known at the time of disclosure, there could be a good argument that they should have disclosed them." In a court filing, Revlon said the allegations were frivolous and that it had told investors about Revlon's improving long-term prospects. It's unclear where the lawsuit goes from here. But it's a potent reminder of the prerogatives of moguldom. "If the largest shareholder wanted more common stock," said BMO Capital Markets analyst Connie Maneaty, "why should anyone sell?" Write to Dennis K. Berman at dennis.berman@wsj.com Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com More In Deals Email Printer Friendly Order Reprints Share: facebook Twitter Digg StumbleUpon Viadeo Orkut Yahoo! Buzz Fark Reddit LinkedIn del.icio.us MySpace ”
