The large debt on Revlon’s (NYSE:REV) books continues to weigh heavily on the stock as ratings firm Moody’s places the stock on review for a potential downgrade. Revlon announced its acquisition of Spanish beauty care player The Colomer Group for $660 million on August 5.
This deal is an attempt to regain lost ground in the hair color segment and could be finalized by the end of fiscal 2013 with the issuance of a new $1.37 billion senior secured term loan due 2019 and an additional $140 million revolving line of credit, which substantially increases the company’s debt. This deal gained the attention of rating agencies and investors alike as this will add to an already levered balance sheet.
What Does the Acquisition Mean?
The deal reunites Revlon with its professional products division that was sold to Colomer’s parent company, CVC Capital Partners, for $315 million in 2000 to pay off its debt. The global hair care market showed strong growth between 2007 and 2012, growing at a compounded annual growth rate (CAGR) of 5.3% to $78.56 billion. However, Revlon has been losing market share to other brands such as Wella from Procter & Gamble (NYSE:PG) and Garnier and L’Oreal Professional from L’Oreal (PINK:LRLCY) in the hair care segment. Its global market share in the segment dipped from 0.46% in 2007 to 0.28% in 2012, and expects the Colomer acquisition to provide impetus to its hair color business.
The acquisition is also expected to bolster Revlon’s sales internationally. Revlon has had negative sales growth in the Europe Middle East Africa (EMEA) market over the past few quarters, and this acquisition will support sales from the region as Colomer generates about half of its sales from the EMEA region and 40% from the United States. We expect the market share in hair care products to gradually improve for Revlon after the completion of the acquisition in Q4 2013.
What Does a New Issuance of Debt Mean?
The issuance of the new term loan would cut down interest expenses further in the future. The company reports that part of the proceeds from the new issuance would go towards repayment of its existing $675 million senior secured term loan, in addition to the $660 million acquisition of The Colomer Group. The constant refinancing of its huge debt certainly cuts down interest expenses for Revlon, thereby improving operating and net income margins. However, we are still cautious on the extent of the impact on the margins due of debt refinancing.
We are updating our price estimate of $15.72 for Revlon to reflect Q2 earnings and other segmental trends.