I Am going to review their Revlon deal and if things get confusing I can assure you that it is the subject matter and not the professor. If you go on Macandrew Forbes Wikipedia page it explains their complex transaction history. I Am breaking down what they wrote for you:
Pantry Pride Inc. was purchased in June 1985 as it had losses that could offset gains of the corporation.
They state right from the jump that Pantry Pride was purchased by Macandrews Forbes because it had losses that could offset gains. Pantry is the vehicle they used to purchase Revlon. Ron Perelman first used Mike Milken’s junk bonds to purchase a 38% controlling stake in Pantry Pride. The reason they bought a loser with a loser is because it is a tax write off (as previously stated). They actually purchased Pantry Pride out of chapter 11 (they knew they were buying a stinker).
In 1985, using junk bonds, 38% of Pantry Pride (establishing effective control) was acquired by investor Ronald Perelman, who liquidated its assets, kept its losses on the books to offset profits from MacAndrews and Forbes, which he had previously acquired, and used Pantry Pride as a vehicle to acquire other companies, in particular Revlon. By 1986, the name of Pantry Pride was changed to Revlon Group.
While Ron Perlman loses money on Revlon (as its share price falls) it actually serves as an invisible gain. It appears they are losing money, but they are actually earning money when the stock goes down. Every dollar they lose is a dollar they earn (these losses are written off against gains). It benefits their leveraged buy out firm MaCandrews and FORBES. Mike Milken and his partners at Drexel Burnham Lambert collect exorbitant interest returns on the junk bonds they use to acquire these companies. Junk bonds pay a very high rate of return, because of a perceived risk. There is no risk to Mike’s investors on these particular deals. People who buy AAA government bonds get lower rates of return (and there is more risk). You should be confused- nothing is what it seems. Ivy league kids are stupefied reading my words. It is a good thing I only took a beginners business class and struggled to get a C at Berkeley.
The interest costs that they incur do not get paid by Macandrews and Forbes, instead the costs get absorbed by Revlon. Remember that the company Pantry Pride that is purchasing Revlon was originally purchased because it had losses that could be offset against gains of their corporation (that corporation being Macandrews Forbes). Here are the specific details of Pantry Prides acquisition of Revlon:
In 1985, Perelman took on his biggest deal yet: The Revlon Corporation. Financed with over $700 million in junk bonds from Michael Milken's firm Drexel Burnham Lambert, Pantry Pride Inc. offered to buy any or all of Revlon's 38.2 million outstanding shares for $47.5 a share when its street price stood at $45 a share. Initially rejected, he repeatedly raised his offer until it reached $53 a share while fighting Revlon's management every step of the way. Forstmann Little & Company swooped in at $56 a share, a brief public bidding war ensued, and Perelman triumphed with an offer of $58 a share. Perelman paid $1.8 billion to Revlon's shareholders, but he also paid $900 million of other costs associated with the purchase. Perelman had Revlon sell 4 division: 2 for $1 billion, vision care division for $574 million and National Health Laboratories division became a publicly owned corporation in 1988. Revlon stubbornly resists turning a profit. As of the first quarter of 2007, it has had one profitable quarter in the past 32. Its lack of profitability shows in its stock price which has plummeted to less than $1.20 a share as of 2007.[8] A major cause of Revlon's financial problems is the huge debt load stemming from Perelman's purchase of the company.
These guys are amazing (and I mean that in the worst possible way). Mike and Drexel set up Ronald’s Pantry Pride with a $700 million dollar line of credit. They call their friends who are on the board at Revlon and tell them to buy all they can at $45 per share. Ronald and Mike are coming in with some funny money to purchase their company at a healthy premium. The previous paragraph states that Ronald was willing to purchase “any or all shares of the company.” If they bought all of the shares of the company, why would the stock continue trading? When one company buys all of the shares of another company, they take it private. If they own all of the shares then who would be trading the stock? If Pantry Pride purchased all 38.2 million outstanding shares then all future trading would be among themselves. Gives new meaning to the term insider trading.
When Perleman “triumphs” he pays $58 for a stock that was trading at $45. Nothing fundamentally had changed that would justify paying such a premium. They even bring in their buddies from Forstman to gain some publicity and increase the share price a little. They claim that Forstman came in with a bid for $56 a share and that a “brief bidding war ensued” before Ronald triumphed…When they say brief they mean it. If Forstman offered $56 then what was Pantry Pride and Ronald’s counter offer? Not $57 because then Forstman group would have re-countered at $58. All the while they are telling the board members to hang tight they are going to golden parachute out shortly. Now Ronald and Mike pay 1.8 billion to purchase Revlon. And another 900 million of “costs associated with the transaction.” I will explain what this 900 million premium was a little bit later in this writing.
Here is where things get confusing…I assure you the problem is with the subject matter and not the man doing the explaining. The way that I determined the original book value of Revlon (before they got raided by Pantry) was by multiplying 38.2 million outstanding shares by the $45 share price…The total value equals $1,719,000,000. Pantry paid $58 per share-$58 x 38.2 million outstanding shares equals $2,215,600,000. Macandrew Forbes inflated Revlon’s asking price by $496,600,000 ($2,215,600,000 - $1,719,000,000). They say that Perelman paid $1.8 billion to Revlon’s shareholders. We know that the total value of all the outstanding shares was $2,215,600,000. If you subtract $1.8 billion from $2,215,600,000 you will get $415,600,000. If you divide the previous mentioned balance by $58 per share it will total 7,165,517 shares still outstanding. This means that Ronald Perelman and Macandrew Forbes purchased approximately 83% of Revlon. Seven million shares divided by thirty eight million shares represents 18.5%...Subtract 18.5% from 100% you get 82.5%. The reason that they did not buy all of the outstanding shares is because of the reasons I discussed earlier in this writing. If they owned all the shares they would be trading with just themselves and their shares would become illiquid.
This is where things become extremely hazy. The company that Pantry raided for $1.8 billion plus $900 million in Mike’s incidentals has not earned a penny in over 26 years. From the time they purchased Revlon in 1985 until 2007 they have had only one profitable quarter. If the company were earning fifty million a year this would still be considered a bad investment for $2.7 billion (the company was worth $3,186,000,000 if you include the other 18% in equity + 900 Million in Drexal junk). If the company were earning fifty million a year it would take Pantry 63 years to recuperate its investment (not adjusted for inflation). Even if the company were to earn $100,000,000 a year it would still take them 31 years before they broke even. Somehow this company has never earned one SINGLE PENNY!
Let’s sea if we can identify the reasons Revlon has become such a loser for the other 18% of shareholders.
A major cause of Revlon's financial problems is the huge debt load stemming from Perelman's purchase of the company
Guess who makes big money on this transaction…Mike Milken and Drexel. That is why they saddled the company with an extra 900 MILLION in debt. These extra borrowing costs ensure that Revlon never earns a penny. That way everyone wins…Except for the unsuspecting Revlon shareholders that own the other 18% of the company (they are collateral damage). The other losers include American taxpayers who have to pay taxes on their financial gains. Mike and Drexel Brunham Lambert collect these exorbitant interest rates from Revlon shareholders. Ronald is happy to pay these interest costs because these costs are the reason his stock continues plummeting and this is why he is able to continue writing off losses (through Macandrew Forbes). Don’t forget that Ronald is a Corporate Raider (also known as a Pirate). In order to ensure that this investment never returns a penny he immediately sold off the most profitable assets for almost two billion dollars. This money gets neatly folded back into Drexal and Macandrew’s pocket. The other shareholders never sea this money…There was never a DIVIDEND paid. By first saddling the company with 900 Million of Mike’s junk and then selling off and pocketing some of the most valuable assets Ronald is left with a shitty cosmetics company that will never turn a profit. Now Ronald writes off these losses against gains in companies which he is artificially inflating the stock price on. This is how they park their losses. How did I do at explaining how Wall Street works?
Like Gordon Gecko (the lizard) says Greed is Good. I heard that the character Michael Douglas played in the movie Wall Street was based on Mike Milken.
In April 1990 Mike Milken pleaded guilty to Six felonies, including illegally concealing stock positions, helping clients evade income taxes and a conspiracy, involving secret record-keeping
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