Nestle Said to Explore Ways to Reduce $30 Billion L’Oreal Stake

Photographer: Dhiraj Singh/Bloomberg

Buying back Nestle SA’s stake would make sense for Paris-based L’Oreal SA, Chief Executive Officer Jean-Paul Agon said last month in an interview with Le Monde, who added that the cosmetics maker has the financial resources that would make it possible. Close

Buying back Nestle SA’s stake would make sense for Paris-based L’Oreal SA, Chief... Read More

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Photographer: Dhiraj Singh/Bloomberg

Buying back Nestle SA’s stake would make sense for Paris-based L’Oreal SA, Chief Executive Officer Jean-Paul Agon said last month in an interview with Le Monde, who added that the cosmetics maker has the financial resources that would make it possible.

Nestle SA (NESN) is exploring ways to reduce its $30 billion stake in L’Oreal SA (OR) and has signaled its intentions to the management of the world’s largest cosmetics maker, people with knowledge of the matter said.

Nestle has raised the issue to L’Oreal at the highest levels and both sides have discussed the matter with banks, said the people, who asked not to be named because the talks are private. Any move to gradually reduce the 29 percent stake could take years, several of the people said, citing the size of the holding and the close, complex nature of the relationship between the companies and the Bettencourt family behind L’Oreal.

The two consumer companies would have to agree on the timing, as would the Bettencourt family, which owns 31 percent of L’Oreal. While talks have been on and off again for some time, preparations have picked up ahead of April’s expiry of restrictions on Nestle’s stake imposed by a shareholder agreement with the Bettencourts, some of the people said.

The Swiss firm is focusing on paring its investment because cosmetics don’t fit its long-term nutrition and health strategy, the investment ties up capital and has already generated sizable returns, said one of the people. Nestle could decide to retain its holding if the Vevey, Switzerland-based company doesn’t agree on a plan with the maker of Maybelline cosmetics and the family.

Nestle, already sitting on more than $6 billion in cash and short-term investments, doesn’t have an immediate plan to redeploy proceeds from a sale, two of the people said. The key for Nestle is selling shares at the right price, one of the people said. No decision has been made about when a sale could start, several of the people said.

Nestle Options

The Swiss food company has several options on how to exit. The company could sell shares to L’Oreal, the Bettencourt family or the public, or a combination of those three, the people said. L’Oreal could also buy shares and take them out of the market, which its shareholders would like because it would increase the value of their existing holdings, some of the people said. Complicating any discussions are the different interests of the owners, which include France’s richest person and two of Europe’s biggest consumer companies, the people said.

A spokesman for Nestle declined to comment, referring only to the company’s previous statement that the future of Nestle’s participation in L’Oreal is an important topic for the group and that the board is addressing the matter with “great attention.” An official for L’Oreal declined to comment.

Sanofi Stake

Meanwhile, French pharmaceuticals producer Sanofi (SAN) has said it would consider buying back some of L’Oreal’s 8.9 percent stake in the drugmaker if it were to become available. L’Oreal could use cash from a sale to buy back its shares from Nestle, two of the people said.

The companies said last year they were keeping all options open ahead of April. Nestle, the maker of KitKat bars, can already sell its shares, though it has to offer them first to the family. That preemption right expires April 29, along with a provision forbidding alliances with third parties.

Buying back Nestle’s stake would make sense for Paris-based L’Oreal, Chief Executive Officer Jean-Paul Agon said last month in an interview with Le Monde, who added that the cosmetics maker has the financial resources that would make it possible.

Such a move would boost earnings, he said, and allow L’Oreal to cancel the shares, boosting the value of its stock. Were L’Oreal to buy the stake, it could return some of the stock to shareholders, two of the people said.

No Synergies

Agon has said he doesn’t see any synergies between L’Oreal and Nestle. The companies have two joint ventures that are small parts of each company’s business.

L’Oreal shares were unchanged at 123.50 euros as of the close of Paris trading yesterday, valuing the company at 74.9 billion euros. Nestle advanced 1.7 percent to 67.60 Swiss francs in Zurich, bringing its market valuation to 218 billion francs. If Nestle sells the stake, it could use the cash to fund acquisitions, said Exane BNP Paribas analysts including Jeff Stent in a Jan. 14 research note.

Exane believes Nestle will sell the stake and that its “real acquisition intentions” may be more significant than the small bolt-on deals that management has said it wants to do, the analysts wrote.

The question of what to do with the L’Oreal holding has taxed Nestle since 2000, when Chairman Peter Brabeck-Letmathe was CEO and proposed a stronger push into cosmetics. The board deemed that too ambitious and Brabeck-Letmathe decided instead to focus on nutrition and health, according to the company’s official history.

Bettencourt Family

Nestle bought a stake in L’Oreal in 1974 from the Bettencourts. The holding generates about a 10th of the net income generated by the maker of Purina dog food and Nescafe instant coffee.

Still in effect after April will be an agreement barring Nestle from acquiring more L’Oreal shares until six months after the death of the daughter of L’Oreal founder Eugene Schueller and family matriarch, Liliane Bettencourt, 91. A court in 2011 put Bettencourt under the care of her family, ruling she was no longer mentally fit to manage her affairs.

The Bettencourt family remains committed to L’Oreal and has no plans to sell its stake, the family said in August.

To contact the reporters on this story: David Welch in New York at dwelch12@bloomberg.net; Aaron Kirchfeld in London at akirchfeld@bloomberg.net; Jacqueline Simmons in Paris at jackiem@bloomberg.net

To contact the editor responsible for this story: Jeffrey McCracken at jmccracken3@bloomberg.net

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