Written on: February 11, 2014 by Don Farrell
Swiss food group Nestle is selling an 8 percent stake in L’Oreal to the French cosmetics firm for 6.5 billion euros ($9 billion), loosening their 40-year partnership and allowing both firms to boost earnings per share.
However, Nestle said on Tuesday it remained committed to the maker of Garnier shampoo and Lancome creams for the “long haul”, dampening speculation it might sell its remaining 23 percent stake anytime soon.
“This transaction is a bit of a let down,” Liberum Capital analysts said in a note, referring to media reports that L’Oreal might buy a larger proportion or even all of Nestle’s stake.
At 9.25 a.m. ET L’Oreal shares, which had leapt on Monday on speculation of a larger stake purchase, were down 3.6 percent at 124.4 euros. Shares in Nestle, home to Gerber babyfood and Kit Kat chocolate bars, were down 1 percent at 66.9 Swiss francs.
Nestle Chairman Peter Brabeck told reporters the Swiss firm planned to stay a major investor in L’Oreal, which on Monday posted forecast-beating quarterly sales.
“I do not see this as a first step of leaving L’Oreal … not at all,” he said. “We are in here for the long haul”.
However, asked if Nestle would consider selling another tranche of L’Oreal shares, Brabeck said: “We shall see.”
The Swiss firm has been a major shareholder in L’Oreal since 1974, when L’Oreal heiress Liliane Bettencourt, now the world’s richest woman, sold around half her stake to Nestle for fear L’Oreal would be nationalized if Socialists came to power.
Under their pact, Nestle and Bettencourt promised not to sell their stakes without first offering them to the other.
With that agreement due to expire on April 29, 2014, speculation had been mounting the two firms would strike a deal before Nestle became free to sell its stake elsewhere.
L’Oreal said it would cancel all the shares it buys from Nestle, boosting its earnings per share by more than 5 percent.
But it will have to wait to buy more shares – if it is offered the opportunity – as French rules mean it cannot cancel more than 10 percent of its shares over an 18 month period.
“We’ll leave it at that for now,” L’Oreal Chief Executive Jean-Paul Agon told reporters.
Nestle said it would use cash proceeds from the deal to buy back its shares, without disclosing details.
L’Oreal will pay for the deal with 3.4 billion euros in cash and by selling to Nestle its 50 percent stake in their Galderma dermatology venture for 3.1 billion euros, including about 500 million of debt, which Nestle will pay for in L’Oreal shares.
One of the highlights of the deal for Nestle was the Swiss group’s commitment to grow its dermatology business as part of its drive to focus on health, wellness and nutrition.
This division “shows which direction Nestle plans to take,” said Laurent Dobler, manager of the Renaissance Europe fund with more than 1 billion euros under management. “The dermatology market is fragmented but promising.”
Nestle is paying a multiple of 26 times Galderma’s 2013 operating profit, which some analysts said was not cheap considering the venture’s sales growth slowed to 3.9 percent in 2013 from 5.9 percent in 2012.
While some analysts were disappointed Nestle did not sell a larger stake in L’Oreal to fund a bigger buyback, Bernstein’s Andrew Wood said ongoing relations between the two firms kept open options for future nutrition-cosmetics ventures.
“We note that the Inneov (nutri-cosmetics) joint venture between Nestle and L’Oreal was not included in today’s transaction, and remains a crossover area,” he said.
L’Oreal said it could fund the deal without selling its 9 percent stake in drugmaker Sanofi (SASY.PA), worth $12 billion, dampening speculation Sanofi might get a chance to buy back the stake and boost its own earnings per share. <ID:L5N0LG1ZM>
The deal will cut Nestle’s holding in L’Oreal to 23.29 percent from 29.4 percent, while the Bettencourt Meyers family’s stake in L’Oreal will rise from 30.6 percent to 33.31 percent. The deal is expected to close in the first half of this year.
Explaining the deal, L’Oreal’s Agon said: “Nestle’s stake reduction had to allow it to remain a strategic shareholder … while making sure that the Bettencourt family stayed below the 33.33 percent level.” Beyond that level, the family would have to make an offer for the rest of L’Oreal’s share capital.
Some analysts said it was possible the Bettencourts could obtain a waiver from regulators from having to make an offer for the rest of L’Oreal if Nestle decided to sell more of its stake to the French firm and the shares were canceled – which would raise the Bettencourts’ stake beyond 33.33 percent.
Marco Sormani at Varenne Capital Partners, which has 200 million euros under management including shares in L’Oreal, said buying back its shares made sense for the cosmetics group. “Considering the low-interest rate environment, you make much better use of your cash buying back shares and cancelling them than letting the cash sit on your balance sheet,” he said.
L’Oreal had net cash of 2.2 billion euros at the end of December and estimated it would have net debt of 700 million euros after the transaction.
Nestle was advised by Rothschild and L’Oreal by BNP Paribas and Lazard.