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June 13 (Bloomberg) -- Elizabeth Arden Inc.’s worst earnings report may have put the company in play.
The shares sank the most in more than five years on May 13 after declining perfume sales resulted in a surprise loss for its latest quarter. The $855 million company, which hired Goldman Sachs Group Inc. to explore its options, had already attracted interest from at least one potential buyer so far this year, LG Household & Health Care Ltd. While the South Korean company said this week it hasn’t yet decided whether to bid, the stock rose 16 percent amid speculation a deal is imminent.
The sinking stock price doesn’t reflect any lost value in the brand and a deal could benefit both the acquirer and Elizabeth Arden, Telsey Advisory Group said. Cosmetic brands tend to sell for about three times revenue, said B. Riley & Co., implying about $1.4 billion for the Elizabeth Arden line, before accounting for its other brands. A deal looks more expensive considering its weak earnings. An offer for more than $1 billion would make it one of the industry’s priciest acquisitions relative to profit, according to data compiled by Bloomberg.
“When you have a company with a valuable brand and the share price drops because all of a sudden there’s mis-execution, then there’s going to be interest,” Linda Bolton Weiser, a New York-based analyst at B. Riley, said in a phone interview. “They reported a really awful March quarter. The valuation declined and yet the brand is still the brand, so it still has the inherent value that it always would have had.”
Representatives for Elizabeth Arden didn’t respond to a phone call or e-mail seeking comment.
Last month, the company posted a net loss of $26.4 million for its fiscal third quarter, the worst since at least 1997, saying sales slid 20 percent.
About a third of its $1.24 billion of revenue in the past 12 months came from Elizabeth Arden namesake products, while the rest was from celebrity fragrances such as Justin Bieber and Nicki Minaj and designer perfumes such as BCBGMaxazria and Juicy Couture. It also has a minority stake in the third-party operator of the Red Door beauty spas.
To open itself up to more buyers and command a higher valuation, the company could sell its core brand separately from the fragrance business, said David Wu, a New York-based analyst at Telsey Advisory Group. Sales for the Elizabeth Arden brand don’t reflect how well-known the name is, leaving room for a buyer to try to narrow that gap, he said.
“There’s a huge disconnect between the high brand awareness and relatively low sales volume,” Wu said in a phone interview. “If you think about the core EA brand, there’s really an opportunity to grow across all regions -- the U.S., Europe and Asia. An acquirer with a strong distribution network and R&D capabilities could help drive stronger top-line growth.”
Elizabeth Arden hired Goldman Sachs to contact private- equity firms and other potential buyers, a person familiar with the matter said in April, asking not to be identified because the matter is private. The company confirmed the move last month and said it was exploring strategic alternatives.
Shiseido Co., the Tokyo-based owner of BareMinerals and Nars, is a possible suitor for the Elizabeth Arden brand, while New York-based Coty Inc., the $6.5 billion company that attempted a takeover of Avon Products Inc. two years ago, could be interested in the entire company, Wu said.
Representatives for Shiseido didn’t respond to a request for comment outside normal business hours. Representatives for Coty also couldn’t be reached.
“I had thought that somebody like Coty would be a better fit because they could really integrate it and take a lot of the costs out,” Weiser of B. Riley said. “Coty would like to have a brand like Elizabeth Arden in its portfolio.”
However, a bid from Coty may be unlikely now that it’s spending $468 million to repurchase stock, she said.
Seoul-based LG Household, which generates almost all of its revenue in its home country, said in April that it’s looking at “big deals” locally and overseas, including one for Elizabeth Arden. While about 60 percent of Elizabeth Arden’s revenue is in the U.S., it also sells its products in Canada, Europe, Australia, South Africa and China.
LG Household’s offer for Elizabeth Arden may be valued at more than 1 trillion won ($983 million), Maeil Business Newspaper reported in April, citing an unidentified investment bank official. LG Household, valued at $7.4 billion, completed its pre-due diligence and may spend the equivalent of $1.48 billion to purchase the company, according to an article this week on DealReporter that cited a newspaper in South Korea.
Including Elizabeth Arden’s $368 million of net debt, an offer at that level would be about 23 times what the company earned before interest, taxes, depreciation and amortization in the past 12 months, data compiled by Bloomberg show. That would be among the most expensive cosmetics deals larger than $500 million, which have gone for a median of 13.5 times Ebitda, the data show.
Hee-Jung Park, a representative for LG Household, said in an e-mail earlier this week that while Elizabeth Arden is a target LG Household is considering, “no specific details have been determined as of now.”
Park couldn’t be reached for further comment outside of normal business hours.
Shares of Elizabeth Arden declined 0.1 percent to $28.74 at 9:46 a.m. New York time today. If the company doesn’t get acquired, they may trade for only about $30 in the next year, according to the average of analysts’ estimates compiled by Bloomberg.
An offer for about $1.5 billion would be at the high end of the $30- to $41-a-share range that Wells Fargo & Co.’s Joe Lachky sees as “most realistic,” the analyst wrote in a June 11 report. The multiple appears high because Elizabeth Arden’s earnings are currently depressed, though it will likely take several years to get back to peak earnings, he wrote.
Albert Saporta, head of research at Makor Capital Ltd. and a managing director at AIM&R, said he values Elizabeth Arden at $35 to $40 a share in a sale. That said, the market is pricing in a low probability of an offer at the midpoint of that range, he said in an e-mail.
It’s a “very attractive” situation for investors to bet on because “the chances of a deal are way higher than that,” Saporta said. “I think the probability is well above 50 percent.”
--With assistance from Joshua Fineman and Jodi Xu in New York and Shinhye Kang in Seoul.