Ron Perelman, one of the wealthiest men in America, sits down for his first ever Q&A.
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Perleman's holding company, MacAndrews & Forbes, has a portfolio that includes Revlon (comestics and personal-care products), Marvel Entertainment (youth marketing, including Toy Biz, Fleer trading cards and Marvel comic books), the Coleman Company (outdoor recreation equipment), New World Communications Group (television broadcasting, production and distribution), Mafco Worldwide (flavors), Meridian Sports (water sports, including Boston Whaler boats), First Nationwide Bank (multistate banking), National Health Laboratories (clinical diagnostic-testing laboratories) and Consolidated Cigar Corporation (cigars).
Today, Perelman's efforts are focused on building a television-broadcasting empire. He is mentioned in the same breath as Rupert Murdoch, Ted Turner and Time Warner. Because of Murdoch's $500 million investment in Perelman's television stations, which are now affiliated with Murdoch's Fox Network, Perelman is even seen as a potential competitor against the big three networks: NBC, ABC and CBS. At the same time, he has used his investment in Marvel Entertainment to build a portfolio of marketable "action characters" similar to the Walt Disney Company model of animated characters.
Throughout this extraordinary period of success, Perelman has remained one of the least-known businessmen in the country. He has frequently been photographed at society events (holding an ever present cigar), but has never before given a one-on-one, question-and-answer interview.
In this wide-ranging session with Cigar Aficionado Editor and Publisher Marvin R. Shanken, Perelman discusses his love of cigars and his investment in Consolidated Cigar Corporation, as well as how he has built his business. He shares his own major disappointment, the acquisition that got away--Gillette. Perelman also talks for the first time about his relationship with investment banker Michael Milken and about his firm belief that there's nothing wrong with making money.
Perelman: This is my first interview.
Shanken: In New York magazine it said you rarely give interviews.
Perelman: This is the first one. I've given background before, but never a Q&A.
Shanken: All the stories I've read about you have a lot of information, but they're never in first person. I'm flattered and honored.
Perelman: It's a pleasure to be here. I've always been afraid of the press. My point of view is that the press could never do me any good, just a lot of harm. And as a result, I just tried to avoid the press. Then we got to a point where that was impossible. I've finally come out of the closet a bit.
Shanken: Let's get right into the interview. It's very unusual for someone to buy a company, sell the company and then buy the same company back, as is the case with Consolidated Cigar Corporation. It's particularly novel when we're talking about a product like a cigar, which is so personal to you. Could you tell us why you acquired Consolidated, why you then sold it and why you decided to buy it back?
Perelman: It's actually very simple. We first saw the company when Gulf & Western owned it. I had negotiated with Charlie Bludhorn and Martin Davis. We reached all the economic points of agreement, but the deal fell apart on technical issues, such as the representations and warranties that we had wanted from Gulf & Western, and that they were reluctant to give. [Consolidated] then ended up being sold in a management buyout. This management group ran into some real personality issues among themselves and ended up in serious litigation, with [Consolidated] suffering because of the lack of a focused manager. I reached out to one of the management group to see whether they'd be interested in selling. Of course they said yes, and we very quickly negotiated a transaction.
Shanken: Did you want to buy Consolidated because it was a business that held a lot of potential for growth or was it because it was a cigar company?
Perelman: I have stayed away from buying companies that I don't think I'd enjoy owning. That's from the point of view of having a product that I think makes people happy or a product that does some good or a product that is just fun and interesting to own and operate. And Consolidated Cigar fit all that. It's a company that I thought had an enormous amount of potential but also had a product that I thought brought people a lot of pleasure. It's also a product that I've got some identification with because I'm such a strong smoker. We bought it, and Theo Folz, who is currently the chief executive officer, was wooed away from another company to join us, and he's done a fabulous job. Then it reached the point where I thought that from a financial point of view we were offered a very attractive price for the company, and I agreed to sell it.
Shanken: Was it for sale?
Perelman: No, it wasn't for sale.
Shanken: An investor came to you and said we'd like to buy your cigar company?
Perelman: The LBO funds were very flush with capital, they needed to do transactions, and they were paying up for transactions. And from a financial point of view, the deal was an interesting transaction. But I still really liked the company and really liked the product, so that when I heard that they wanted to sell it again out of the LBO fund, we approached them and said we have serious interest, and in very short order, we negotiated a transaction and bought it back.
Shanken: When you bought it back, you paid a substantially higher price.
Shanken: You sold Consolidated at what you thought was a very high price in 1984. And then you bought it back at a price well above what you sold it for? According to published reports, you paid $118 millionfor it in 1984 and sold it for $138 million in 1988 and then reacquired it for $188 million in 1993.
Perelman: Theo did a fabulous job in the two years that he ran it for the LBO fund, and it was worth more when we bought it back than it was when we sold it. So it still was a very interesting financial transaction for us to buy it back. I'm glad to be back in the business. I love the business.
Shanken: How do you decide which companies you are interested in buying?
Perelman: There's a financial profile for the companies that we'll buy and won't buy. They've got to be stable cash-flow generators, they've got to be non-capital-intensive cash-flow generators, they've got to be nonfashion and nonfad and non-high-tech. And other than these two categories--fashion and high-tech--we'll look at anything. I look with more interest at companies that excite me with their product line.
Shanken: You say nonfashion and non-high-tech. Isn't Revlon fashion?
Perelman: No. It might be in a given year. In a certain season, certain fashion colors--that this year reds are more popular than the pinks--but we just change the blend a little bit. Cosmetics are a product that has been around for thousands of years and will be around for thousands of years in the future, and you know, besides a slight variation in color, there's really no shape difference or length difference.
Shanken: In terms of Consolidated, it seems as though the repurchase in 1992 was perfectly timed to go with the cigar renaissance. Maybe you didn't know it six months before, but it was very clear six months later that there was something exciting going on in the cigar market. What is your outlook for the future of cigar smoking, given the social climate and the antismoking restrictions and regulations that seem to be spreading across America?
Perelman: We're very optimistic about consumption in the long term. The baby boomers have shown a real interest in smoking cigars. You now have real public cigar smokers--celebrities, sports figures, movie personalities and the like--so that there is sort of an endorsement by the celebrities of cigar smoking and the pleasures associated with it. There are more smokers now than, say, five years ago, but of course consumption is way down from its peak.
Shanken: But are you concerned about owning a business in an industry that has so much negative pressure and restrictions from government? It's not cigarettes, but cigars still suffer from the same smoking restrictions.
Perelman: It's less pressure from government than it is social pressure as to where cigar smoking is permitted and socially acceptable. But I think even that is changing a bit. I think restaurants that previously would not allow cigar smoking are now becoming more lenient. If they allow cigarettes, they'll allow cigars in the same smoking section. And I think that gradually the public is getting more used to and more accepting of cigar smoking in public restaurants and other facilities. We are very optimistic on cigar usage and consumption.
Shanken: Earlier, you said you like companies with stable cash flows that don't need a lot of additional investment on the part of the buyer. But you bought a company that today, due to sharply increased sales,has a very significant back-order situation: it is not able to produce and ship enough cigars to meet retail orders or the demand in the marketplace. Do you have plans to expand your facilities and your manufacturing personnel? What has your directive been to Consolidated to handle this happy problem?
Perelman: We are looking at expanding our facilities both in physical size and capacity vis-à-vis the workforce. But that is a slower process because skilled hand laborers are required, and it is not something that can be taught overnight. But, clearly, we are committed to filling the demand as it continues, we hope, to increase. The managers will do whatever they think is necessary to run the business efficiently. If it means counting a higher level of income to support a higher level of sales, they would just do that routinely.
Shanken: Have you discussed with Consolidated's management new brands, new approaches, new marketing? Consolidated is the largest producer of cigars in America, both in the midprice, as well as...
Perelman: Mass market.