Why does Ronald O. Perelman, the aggressive and acquisitive chairman of Revlon Group, keep trying to buy Gillette Co., the maker of the world's best-selling razor blades? Because he knows the value of its brand name and believes that Gillette's institutional investors will help him gain control of it.
Perelman is willing to pay handsomely. Last week, the 44-year-old Wharton School MBA, who in less than a decade has acquired his way to control of a company with $1.6 billion in revenue centered on Revlon cosmetics, declared that he is willing to pay $47 a share for Gillette. It was Perelman's third offer in less than a year for the Boston-based company, and the highest so far--putting a total market value of $5.4 billion on Gillette.
That's more than double the value of Gillette's total assets, over 10 times the value of its shareholders' equity and roughly 25 times the $1.90 a share earnings that analysts project for the company in 1987.
But Gillette, which said it is studying the offer, clearly doesn't welcome it. Last November, it paid Perelman to go away by buying back stock from him and getting him to agree not to buy Gillette stock for 10 years without approval from its directors.
Appeasement didn't work. Perelman pocketed a $34-million profit from the stock repurchase and came back with a $40.50 a share bid in June that was rebuffed, and now $47 a share.
Why is Perelman being so generous? Some analysts say he wants to attract another buyer because he gets a substantial payment if Gillette sells to someone else. But the evidence indicates that this raider is out for more than a quick buck.
Perelman seems clearly to want Gillette's franchise in razor blades, which he sees as a hidden value in today's company. The blade business, which delivers 73% of Gillette's operating profit on less than a third of its $2.8 billion in sales, is being obscured by Paper Mate pens, Silkience shampoos and other less-successful products. Perelman, as he has done elsewhere, would sell the losers to let the winners shine through.
Pressure to Sell
Investing institutions like that kind of insight. Quaker Oats, the old cereal company, gained investor support because it had the wit to buy Stokely Van Camp, the canned goods company, in order to get its athletic drink Gatorade. And they like brand names. As evidence, investors value Coca-Cola at $11 billion more than that company's assets, and Pepsi's market value is $2 billion more than its assets.
But the market was giving almost no premium to Gillette until Perelman's offers came along. Now the stock is selling at its highest price ever. Which means that institutional money managers, who hold 55% of Gillette, will be putting pressure on the company to support the new price--by selling to Perelman or another buyer, or by selling some product lines to give greater prominence to the profitable blade business.
Which will it choose? Chances are, says analyst Diane Mustain of the Duff & Phelps research firm, that Gillette management will sell Paper Mate and buy back stock or otherwise lift the share price--denouncing Perelman all the while as a mindless raider.
But Perelman, who is backed in his latest offer by First Boston and Citibank, may not go away. Gillette's blades and its Right Guard deodorant fit too nicely into his long-term goals, which appear to be building a mass market toiletries business.
Consider what he has done with Revlon since winning it in a takeover fight in 1985. By that time, Revlon had lost its cache as a glamorous cosmetic, sold only in fashionable department stores. So Perelman made a virtue of necessity. He added Max Factor, Germaine Monteil, Almay and Charles of the Ritz cosmetics to the Revlon company line and now is heading for a leading position in the health and beauty aids sections of drugstores and supermarkets.
The lesson: Never underestimate your adversary. If Perelman had only wanted the quick buck, Gillette would have been rid of him long ago. But the fact that he wants to build a business means that Gillette's managers, whatever they do today, haven't heard the last from Perelman.