Revlon Inc. stock was down 12% in Wednesday trading after a bankruptcy court judge ruled against minority shareholders who had asked to form a special committee to represent them in the cosmetic company’s Chapter 11 case.
lawyers had claimed in court papers that a committee for a minority group would be a waste of money as it does not expect the equity to be worth anything, as Bloomberg reported. U.S. Bankruptcy Court Judge David S. Jones made the ruling during a Zoom
hearing on Wednesday.
The company also argued that shareholders were already represented by majority owner MacAndrews & Forbes as well as other groups. MacAndrews & Forbes is the holding company of investor Ron Perelman, who owns about 85% of the company.
The committee representing unsecured creditors had also asked Jones to reject the minority committee, which owns about 4.7% of common stock, according to Bloomberg.
Typically in a bankruptcy, a company’s stock becomes almost worthless as the creditors who stand above the shareholders in the capital structure have the first claim on assets. But Revlon stock has performed more like the stock of Hertz Global Holdings Inc.
during the car-rental company’s Chapter 11 case in 2020, as the individuals that gather on Reddit forum Wall Street Bets embraced it and made it another of their meme stock bets.
Revlon stock is up 86% in the last three months, as those investors are hoping that it might be bailed out as Hertz was after the grounding of travel during the pandemic forced it into bankruptcy. Its week-to-date losses have reached more than 20%, however.
Hertz was rescued by a group of investors led by Knighthead Capital Management and Certares Management, who put up $5.9 billion in capital on a bet that the travel rebound would eventually benefit the company.
Further fueling those hopes was the news earlier in August that Morgan Stanley
had purchased 400,650 shares in Revlon during the latest quarter, news that was disclosed in the bank’s 13-f filing with the Securities and Exchange Commission.
The stock’s unusual trading has spurred hopes it will retain some value, but that is not guaranteed.
“This has the potential for gruesome outcomes for investors that are playing the Red Bull-driven enthusiasm investment game,” said Eric Schiffer, chief executive and chairman of Patriarch Organization and Reputation Management Consultants, and a restructuring expert.
“Unlike Hertz, the reorganization plan is not beautiful. I think we’ll see continued significant volatility. Some of these stocks that are coming back from the dead in this bear market rally will see the casket closed once the market begins to regain its downward progression, which is likely to happen,” he said.
The Special Situations Research Newsletter had this to say:
Revlon filed for bankruptcy in June after posting a first-quarter loss of $63.1 million that made it impossible to service long-term debt that totaled $3.31 billion at the time.
Still, Schiffer said Revlon could have a future under the right leadership, one that understands how to market to Gen Z customers, who view the brand as somewhat old-fashioned.
“This is a good example of lipstick on a stock that is not warranted,” he said.
Revlon shares are down 39% in the year to date, while the S&P 500
has fallen 13%.