Revlon Group Says It May Boost Its Stake in Salomon
Revlon Group confirmed Tuesday that it has acquired a small stake in Salomon Inc., the parent of one of the nation’s leading securities firms, and said it has asked for government clearance to buy as much as 25% of the company’s stock.
Revlon, a vehicle of corporate raider Ronald O. Perelman, said it was not interested in acquiring Salomon, however. Securities analysts who follow the brokerage industry disagreed over Perelman’s intentions and, beyond that, his ability to take over Salomon even if he wanted to.
The latest statement of Revlon’s plans came as signs appeared that the nearly weeklong battle over an important 14% stake in the parent of Salomon Bros. may herald a period of greater investor interest in several brokerage stocks, including Merrill Lynch & Co., Paine Webber Group and E. F. Hutton as well as Salomon. All four stocks rose in price Tuesday on the New York Stock Exchange.
Bond Losses a Surprise
Those shares are considered more vulnerable than others to takeover bids because their executives and directors hold only tiny stakes in the firms. By contrast, managers of such well-performing publicly traded firms as Morgan Stanley Group and Bear Stearns Cos. hold commanding majorities of their stocks.
Brokerage issues have lagged in the stock market for several months, particularly after Merrill Lynch and other firms reported that a severe April slump in the bond market had cost them millions of dollars in trading losses.
Salomon shares were particularly hard hit because, as a skilled trading house, its bond losses--although smaller than the $377-million hit at Merrill Lynch--came as a greater surprise. Also, Salomon’s top management has been in turmoil following the forced resignation in July of Lewis S. Ranieri, the firm’s vice chairman, and the reshuffling of officers in Ranieri’s old mortgage trading department.
Those changes lent substance to speculation that Salomon’s surge of growth over the previous year had outstripped its executives’ abilities to manage the firm. In its effort to move into the growing London and Tokyo securities markets, the firm in 1986 expanded its staff by 40% to 6,000 people.
Since the beginning of 1987, Salomon shares have fallen more than 9% in price, while brokerage stocks as a group have risen more than 5%. In Tuesday’s trading, which reflected the intensified investor interest in the firm, Salomon rose $2.125 a share to close at $36.875, its second $2-plus rise in two days. It was the second most active issue on the NYSE, with more than 2.8 million shares changing hands.
In fairly heavy trading, Merrill Lynch rose 62.5 cents to $38; Paine Webber gained 37.5 cents to $31.25, and E. F. Hutton was up $1.25 to $37.50.
The fight over Salomon began several weeks ago when the firm’s largest shareholder, Minerals & Resources--a Bermuda-based company known as Minorco and controlled by South African mining tycoon Harry F. Oppenheimer--moved to sell its 14% holding in the investment firm.
In a meeting last Wednesday with Salomon Chairman John H. Gutfreund, Perelman expressed interest in acquiring Minorco’s stake of 21.3 million shares, which is worth close to $800 million at current prices. To stave him off, Salomon arranged to purchase the shares itself, recovering most of the cost in turn by selling $700 million in preferred stock to Warren E. Buffett, a leading securities investor based in Omaha.
The preferred issue is convertible to Salomon common stock at $38 a share, giving Buffett the equivalent of 12% ownership of the firm. It also pays an annual dividend of 9%, meaning that Buffett will receive $63 million annually as a return on his investment.
Finally, Buffett’s corporate arm, Berkshire Hathaway, will get two seats on the Salomon board. Berkshire has agreed to vote its holdings with management and not to acquire more than 20% of Salomon’s voting shares for seven years.
‘A Great Giveaway’
In approving the sale to Buffett, the Salomon board late Monday rejected a counteroffer by Perelman in which he offered to buy the preferred issue under terms that would make it convertible to common at $42 a share. In effect, that would give Perelman only 10.9% of the firm.
Revlon Vice Chairman Donald Drapkin on Tuesday said Revlon “welcomed” Buffett to the shareholder roll of Salomon. “The differences we had were not with him but with the price,” he said. “Mr. Buffett has obviously proven himself a shrewd investor.”
Drapkin said Revlon’s holdings of Salomon shares, acquired in the open market, were currently “insignificant.” He said the company would purchase further shares as market conditions permit.
Privately, sources close to Revlon were deriding the Salomon sale to Buffett as “one of the great giveaways of the century.”
Some market analysts questioned Revlon’s ability to mount a successful Salomon takeover, in part because a buyout would cost more than $7 billion and also because Salomon has few hard assets that could be sold to finance a “bust-up” takeover.
On the other hand, Perelman does have access to billions in cash and financing; he has lately been pursuing Gillette with a $5.4-billion takeover offer.
“He’s got a lot of money, so people have to take him seriously,” said James P. Hanbury, brokerage analyst for Wertheim & Co.
Buffett is a leading exponent of the “value” school of securities analysis, in which investors seek stocks that have been underpriced relative to the fundamental value of a company and hold shares for the long term rather than trading them for short-term profit. He has been exceptionally successful, not the least because corporate managements prefer to have Buffett, rather than a potentially obstreperous raider, holding a significant stake and are often eager to sell him shares at bargain prices, as Salomon apparently has done.
Among his most important holdings are a $517.5-million investment in Capital Cities-ABC that was the linchpin of the merger of the two companies and is now worth more than $1.25 billion, based on the merged concern’s stock price; and a 13% holding in Washington Post Co., of whose chairman, Katharine Graham, he is known to be a confidant. The Post stake is worth about $445 million.
Buffett’s reputation as a sage investor is likely to inspire more interest in other brokerage stocks, particularly those with some breakup value.
“If Buffett buys into the industry,” Hanbury said, “it’s a pretty good indication that there’s value there.”
