Ronald Perelman's MacAndrews & Forbes Inc. should tender for the remaining 22% of Revlon Inc. (REV - Get Report) shares it does not already own for about $500 million and then sell the entire beauty products giant to a strategic suitor, one minority investor believes.

"The idea is so compelling that the only explanation for Perelman not tendering for the shares is that he's financially constrained," Armored Wolf LLC managing director Bradd Kern said. "What's less important is whether he wants to sell the company or not. What's more important is if he ever wants to get fair value for the shares, he has to tender."

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Kern's Irvine, Calif., hedge fund holds an undisclosed minority investment in Revlon and assumed a position in the New York company in summer 2013.

American businessman Perelman, who through his wholly owned, New York-based MacAndrews & Forbes holding company already owns about 78% of Revlon Class A shares, also serves as chairman of the cosmetics company.

While Revlon's Ebitda margins on average sit at a healthy level north of 19%, Kern pointed to an enterprise value-to-Ebitda ratio of just 9.6, substantially below the 13.3 average ratio of eight of its global peers.

Before selling all of Revlon to a strategic buyer, Perelman should tender for the rest of shares at a 25% premium — a typical premium in freeze-out mergers — otherwise a potential takeout price would be depressed by the outstanding minority shares at an artificially low value, Kern explained in a proposal originally released on buy-side research portal on Dec. 22. The proposal noted a confidential letter that included recommendations was sent to Perelman in August 2014.

A 25% premium would imply a tender offer of about $43 per share, or roughly $498 million, based on the $34.57 closing price for Revlon shares on Dec. 18, Kern calculated. MacAndrews & Forbes could then capture 76% upside, or a fair value of $61 a share, and taking into account a 25% control premium then could sell Revlon for as much as $76 a share, according to Kern.

Including the $498 million tender cost, Perelman ultimately would fetch about $1.7 billion in net profit, Kern estimated.

Meanwhile, other investors remain concerned that Perelman could wait for Revlon's stock to tumble before tendering for the remaining shares.

"That's the big risk," wrote Christopher Mittleman, managing partner at Mittleman Brothers LLC, in an e-mail. "When Revlon was around $3.50 in 2009, he tried to buyout all minorities around $5 and was partially successful. Revlon could report a bad quarterly result, the stock price drops to $25, and he makes a magnanimous offer to buy out minorities at $35. He did that with M&F Worldwide, buying out minorities for about half of what we thought it was worth. We owned MFW, so it was very frustrating for us."

Mittleman Brothers, a Locust Valley, N.Y., investment adviser, owns approximately 3.4% of Revlon's Class A shares, which closed at $33.36 Tuesday afternoon

MacAndrews & Forbes on Sept. 12, 2011, snatched up the remaining shares of M&F Worldwide Corp., a New York office products direct marketing service and check producer, for a total enterprise value of $2.4 billion — equivalent to 5.3 times the $455 million in Ebitda M&F generated in 2011, Mittleman noted.

Armored Wolf's Kern, however, believes this concern is misguided.

"The fact that the stock is so undervalued means there's a significant valuation cushion and therefore it's unlikely to fall significantly below current levels," Kern said. "In a way, there's a Perelman put. That Perelman put also makes it so the stock is unlikely to fall."

Selling the company without first tendering for the remainder of shares is also a viable option, just not a value optimizing one, Kern said.

Perelman "doesn't need to buy out minority shareholders in order to sell Revlon if there is a buyer out there willing to pay Perelman's price," Mittleman added, estimating its fair value in a sale in the near term would be approximately $66 per share, applying the 14.7 times Ebitda multiple that L'Oréal Group employed to outbid Joh. A. Benckiser GmbH for Maybelline Inc. in 1995. L'Oreal paid $508 million in cash.

If Revlon were sold to a strategic without Perelman tendering for the remain shares, Kern estimated the company could garner a premium of at least 35%, or about $47 per share, which he calculated would result in $494.1 million in net profit for Perelman.

While he's not aware of any specific takeover interest, Kern suspected global consumer companies would be the most likely suitors while noting that several years earlier companies such as Procter & Gamble Co. (PG) and L'Oreal expressed interest.

While Revlon would be complementary to P&G's CoverGirl business, Mittleman noted that P&G chairman and chief executive Alan Lafley recently indicated he didn't see the company needing to buy more brands.

Unilever NV (UN) , Coty Inc. (COTY - Get Report) and Shiseido Co. Ltd. are among others that could be in the mix, sources noted.

Officials with all three companies couldn't immediately be reached on Tuesday.

"It's pretty big, but Coty could always consider [acquiring Revlon]," said Elsa Berry, managing director and co-founder of Vendôme Global Partners, a New York luxury- and beauty- focused investment banking firm.

"Coty is strategically focused on reducing its dependency on fragrances," Berry said, while noting Coty's previous attempt to acquire Avon Products Inc. (AVP) .

While the list of potential strategic suitors is small given Revlon's size, other possible suitors could include Korean or other Asian players, Berry added.

Revlon, with a market capitalization of about $1.75 billion, has itself grown through M&A.

On Oct. 9, 2013, it completed an acquisition of Barcelona-based Colomer Group Spain SL for $664.5 million, or about 9.2 times Ebitda, from funds advised by CVC Capital Partners Ltd., inheriting a slew of new hair care, lotion and nail polish brands, while at the same time extending its global reach.

Before Colomer, Revlon snapped up the trademark and intellectual property of Pure Ice nail enamel and Bon Bons cosmetics from Bari Cosmetics Ltd. on July 2, 2012, for $66.2 million.

Revlon had a $178.4 million cash balance as of Sept. 30, alongside about $1.87 billion in long-term debt, according to Securities and Exchange Commission filings.

Revlon and MacAndrews & Forbes representatives did not immediately return requests for comment.

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