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Executive Summary

Revlon is beginning its defense against Pantry Pride and its parent, MacAndrews & Forbes, apparently $800 mil. short in ready cash compared to the takeover aggressor. Pantry Pride maintains it has access to $1.9 bil. to fund the takeover attempt from ready cash ($750 mil.), a bank commitment ($500 mil.), and a planned Drexel Burnham Lambert bond offering. Revlon has about $1.1 bil. readily accessible: $700 mil. from an existing bank line of credit and $400 mil. in cash (according to the 1984 annual report). Because of its structure as a health care/cosmetics mini-conglomerate, however, Revlon may have the ability to match the takeover attempt without incurring new debt. The company has a number of separate business segments which could be marketable in a protracted attempt to fend off Pantry Pride. The health care segment -- - built primarily during the last decade under the Bergerac management team -- - is particularly well-suited for divestitures because of the size and distinct natures of the businesses. Revlon could sell one or two pieces of those businesses without having to give up the other parts. It could be harder to extract one of the three major cosmetic operating groups. The futures of USV and Armour are of particular interest to the pharmaceutical business. The businesses were separated from each two years ago to distinguish between the retail Rx business of USV and the institutional and hospital business of Armour. Together USV and Armour have about 500 detailmen. USV has a maturing product line without much in the pipeline for the near future. The company has been searching for licensing candidates. For example, Revlon recently signed an agreement with the U.S. affiliate of the Italian firm Fidia for marketing rights to a product for preventing neurological disturbances associated with cancer chemotherapy ("The Pink Sheet" May 20, T&G-5). Armour's pipeline includes three products from Hoechst GmbH. The two Revlon drug businesses -- with $235 mil. in U.S. sales in 1984 --are in a similar position to the Searle drug business prior to its recent sale to Monsanto. That sale indicates the current value of established drug businesses in the U.S. to peripheral firms wishing to participate on a larger scale. Revlon immediately issued a "not for sale" statement in response to the Pantry Pride overtures, but the demand for cash to fight a takeover could make part of the company available. Revlon's initial response characterized the Pantry Pride takeover attempt as a "junk bond bust-up takeover." Measures to "protect Revlon shareholders" against a bust-up would presumably include planned divestitures by Revlon itself. Also available in the health care segment for possible divestiture are the ophthalmic business: Barnes-Hind, ContinueCare, and Coburn. SmithKline's Allergan has been an aggressive bidder in the contact lens field but has been prevented twice from proposed purchases by antitrust determinations. The Revlon diagnostic businesses include the equipment mfr., Technicon, and clinical labs, National Health Labs. The clinical lab business, in particular, could be an important and lucrative property for Revlon. The company reported a "banner year" for the clinical lab services in 1984 with net sales per employee up 20%. The interest in clinical lab operations has remained high during the transition period to DRGs (diagnosis related group) payment procedures for medical services. A piecemeal divestiture approach to the Pantry Pride offer is most likely, but Revlon could also seek a merger partner for the whole firm. Among possible candidates with experience in some of the same consumer and health businesses that Revlon spans is Rich-Vicks. That firm also has been the rumored target of takeover interest and both companies could protect against hostile approaches through a combination. If Pantry Pride wins in its takeover bid, a breakup of Revlon is also likely. Pantry Pride is in the process of divesting its original businesses (see related item, T&G-5), and the firm has taken on the appearance of an investment house since MacAndrews & Forbes took over control. The Pantry Pride bid, in fact, implies that the whole of Revlon is being valued at less than the potential of its parts. As an immediate step to discourage Pantry Pride, Revlon declared a special dividend of note purchase rights on Aug. 19. Under the plan, designed with the help of Revlon's investment banker Lazard Freres, Revlon shareholders of record Aug. 30 are entitled to exchange their shares for $65 face amount of 12% one-year Revlon notes if a bidder acquires at least a 20% share in Revlon. A company acquiring 20% of Revlon would forfeit its note purchase rights. Revlon followed that deterrent with a $50 mil. suit seeking to enjoin Pantry Pride from takeover activities. Filed in Delaware federal court, the suit notes that Pantry Pride's July prospectus to raise $700 mil. stated that "there is no assurance that earnings from future operations. . .will be sufficient to meet debt service obligations and the dividend requirements on preferred stock." Revlon charged that Pantry Pride's "illegal conduct is calculated to enable (it) to acquire Revlon 'on the cheap' by facilitating a formal tender offer. . .at an inadequate price." Revlon is represented in the fight by Wachtell, Lipton and Paul Weiss Rifkind. Pantry Pride responded to the court part of the takeover machinations with a suit of its own in Delaware state court. Pantry Pride contended that the Revlon poison pill provisions alter "the terms of Revlon common stock without the approval of shareholders." The Pantry Pride suit also claims that Revlon "falsely impl]ies[ that $65 is the minimum fair value for Revlon stock. Pantry Pride said that Revlon's own financial analysis "shows that a fair price for Revlon is very substantially lower that $65." Chart omitted.

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