Parlux Plays See-Saw

This should be filed under the "Not Surprising" category: Parlux Fragrances (Nasdaq: PARL  ) is not going private after all.

The fragrance distributor of such brands as Paris Hilton, Perry Ellis, and Guess had announced last month that its majority owner, CEO Ilia Lekach, was pursuing financing to take the company private at a pre-split price of $29 a share. Sound familiar? It should -- this isn't the first time that Lekach has announced his intention of going private and then not followed through.

Back in 2003, he said he wanted to take the company private and teamed up with Quality King to buy out Parlux. Quality King was run by the chairman of E Com Ventures (Nasdaq: ECMV  ) , which just so happens to be a Lekach-owned business that owns the retail chain Perfumania. Motley Fool Hidden Gems co-advisor Bill Mann has previously highlighted the intricate web of businesses with which Lekach performs numerous related-party transactions. Ultimately, the deal fell through when the investment group couldn't arrange financing. Then last July, Parlux was again apparently put up for sale, but without any takers.

Since that time, Parlux's stock has climbed as high as $38 a share, but this past June, it tumbled down to $20 after analysts downgraded the stock on the basis of lackluster sales for the Paris Hilton line. Now, the stock is trading at about $8.60 per share, after accounting for a 2-for-1 stock split that Lekach initiated to reward the company for its "solid growth and price performance" up to then. (Remember, stock splits are non-events for investors, since they don't enhance shareholder value and simply divide up the pie into narrower slices.)

Lekach then confounded everyone by announcing that he would try to take Parlux private again. Using his privately held PF Acquisitions company, Lekach said he had contracted with investment bankers to look into taking the company private. Surprisingly, the company's board of directors didn't go along.

Noting that Lekach owned more than 26% of the company, either directly or through his affiliated companies, the board was concerned that another failure on Lekach's part to go private would harm shareholders and the company. Not only did board members want $1 million earnest money put up as a deposit, but they also said the unnamed breakup fee was troubling if the deal didn't go through and that Lekach didn't even have financing lined up yet. The company would undergo considerable expense to consider the proposal and might face some steep costs should it fail. Sounds to me as though the board didn't have much faith in its chairman.

Despite the analyst downgrades last month, Parlux has turned in some decent numbers recently, with net income more than doubling year over year to $22.5 million for fiscal 2006. Even so, the stock remains depressed because of management's oftentimes illogical actions.

Not surprisingly, Lekach has announced that he's given up his quixotic pursuit to take Parlux private. Faced with board opposition, shareholder lawsuits, delayed filing of its financial reports, and the threat of a Nasdaq delisting, Parlux would be better served by having its chairman focus his attention on what the company does best, which is sell perfume.

Looking for small-cap ideas that don't exude a certain odor? A 30-day guest pass gives you full access to theMotley Fool Hidden Gemsmarket-beating newsletter.

Fool contributor Rich Duprey does not own any of the stocks mentioned in this article. The Motley Fool has a disclosure policy.


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