Paris Hilton Scent Returns 218% in Parlux Takeover Seen Closing: Real M&A
A takeover to secure the rights to sell Paris Hiltons scent in a bottle is giving traders a chance to triple their money betting on the industrys most expensive acquisition.
Parlux Fragrances Inc. (PARL), which makes perfumes named after celebrities including Hilton and pop-music singer Rihanna, ended yesterday 76 cents below its offer from Perfumania Holdings Inc. (PERF) While Perfumanias stock has slumped since agreeing to pay more than double Parluxs market value in the costliest cosmetics deal relative to earnings, traders can reap an annualized return of as much as 218 percent buying Parlux shares if the company produces enough cash as a condition of the deal when it reports earnings next month, according to data compiled by Bloomberg.
The acquisition would give Perfumania, which operates more than 300 perfume shops across the U.S., control of its largest supplier, helping it lower costs and bolster revenue that fell by the most in almost a decade last year. With Parlux retreating 11 percent from its peak after the agreement was announced in December, Tullett Prebon Plc says the potential reward for arbitragers may now make betting on the takeover worth the risk.
Its an attractive spread, Sachin Shah, a Jersey City, New Jersey-based merger arbitrage strategist at Tullett Prebon, said in a telephone interview. The bottom line here is that if Parlux is able to meet that cash requirement threshold, then the deal should close. They should be in a fairly easy position to generate that cash, he said.
Rebl Fleur
Raymond Balsys, chief financial officer at Fort Lauderdale, Florida-based Parlux, didnt immediately return a telephone call or e-mail seeking comment. A representative for Bellport, New York-based Perfumania declined to comment.
Perfumania sells everything from perfumes to Bed Head shampoo and Kabuki makeup brushes in its outlets nationwide and on its website. By acquiring Parlux, Perfumania would gain the company that makes branded fragrances such as Just Me by Paris Hilton, the 30-year-old hotel heiress and socialite, Rihannas Rebl Fleur and singer Jessica Simpsons Fancy Love.
In December, Perfumania agreed to acquire Parlux for $4 a share in cash and 0.2 of its own stock for each Parlux share held, or about $175 million after accounting for debt and cash, data compiled by Bloomberg show. Parlux shareholders can also opt to receive 0.53333 Perfumania shares in lieu of cash.
The terms of the deal are contingent upon Parlux having at least $15 million in cash and equivalents, according to Tullett Prebons Shah. If Parlux doesnt have enough money when it reports earnings in February, the amount of cash that Perfumania is offering may decrease, he said.
Smell of Money
After surging 71 percent on Dec. 27, Parlux has retreated as Perfumania lost almost half its value. Parlux ended at $5.30 a share yesterday, versus the cash-and-stock offer of $6.06.
Parlux has languished below the deal price because investors are concerne! d it may not be able to come up with the money needed under the current terms, according to John Dorfman, chairman of Boston-based investment firm Thunderstorm Capital. The price that Perfumania agreed to pay also made some traders less confident the deal will be completed, he said. Dorfman doesnt own shares of either company.
At 42 times Parluxs earnings before interest, taxes, depreciation and amortization, the takeover is the most expensive for any acquisition in the cosmetics and toiletries industry greater than $100 million. The 140 percent premium is also the industrys richest since 1999, the data show.
The transaction, valued at about $131 million yesterday, is now greater than Perfumanias own market capitalization of $92.4 million, according to data compiled by Bloomberg.
Cash Requirement
Parlux is trading at a considerable discount, so clearly the arbitrage community thinks theres a real risk that the deal wont get done, Dorfman said in a telephone interview. Arbitragers are handicapping the cash provision by how much of a discount to the offer theyre giving.
Parlux had $12.1 million in cash and near-cash items as of Sept. 30, meaning it needed to boost reserves by $2.9 million last quarter to satisfy the terms of the takeover. In its fiscal third-quarter ended December 2010, Parlux increased its cash position by $6 million, or double the amount required, data compiled by Bloomberg show. In the same period two years ago, the companys reserves grew by more than $5 million.
With Parlux set to report its quarterly earnings in the week ending Feb. 10, according to Tullett Prebons Shah, arbitragers betting on the stock now can reap a profit of as much as 218 percent on an annualized basis if Parlux says by that date that it has enough cash, the data show.
Relative Value
If traders held onto the shares until the end of June, when the deal is projected to close, the annualized gain would! be 32 p ercent. Thats still be the biggest for any U.S. deal with a completion date after February, data compiled by Bloomberg show.
In my experience in doing these types of deals, the target company rarely, if ever, signs a deal when theyre not confident that they will have the required amount of money, Steve Gerbel, founder and president of Chicago Capital Management, a Chicago-based hedge fund that focuses on merger arbitrage, said in a telephone interview. The deal could be attractive versus the risk, he said.
To contact the reporter on this story: Tara Lachapelle in New York at tlachapelle@bloomberg.net.
To contact the editors responsible for this story: Daniel Hauck at dhauck1@bloomberg.net; Katherine Snyder at ksnyder@bloomberg.net.