L’Oreal SA (OR) shares rose the most in almost four years after people familiar with the matter said that Nestle SA is exploring ways to reduce its $32 billion stake in the world’s largest cosmetics maker.
The stock advanced 4.5 percent to 129 euros today in Paris, the most since May 2010, after Bloomberg News reported Feb. 7 that Nestle had signaled its intentions to L’Oreal management, citing people with knowledge of the matter. Nestle was little changed at 67.55 Swiss francs in Zurich.
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.
“We continue to believe that the most likely eventuality for Nestle disposing of the stake is for L’Oreal itself to acquire the stake via a conventional buyback,” said analysts at Exane BNP Paribas, adding that they believe Nestle will formally announce its intentions on the stake in early April at the meeting of shareholders.
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 stake if the Vevey, Switzerland-based company doesn’t agree on a plan with the maker of Maybelline cosmetics and the family.
Nestle 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.
With today’s gain, L’Oreal is valued at 78.2 billion euros. The company is scheduled to report 2013 earnings after the close of trading, with analysts expecting adjusted earnings per share of 5.09 euros. Nestle (NESN) reports results Feb. 13.
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.
A spokesman for Nestle declined to comment, referring 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.
Nestle 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 third-party alliances.
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. Were L’Oreal to do so, it could return some of the stock to shareholders, two of the people said. L’Oreal may buy back about one-third of the stake held by Nestle, or almost 10 percent, said two of the people, though that amount could change depending on the price of the shares.
Pierre Tegner, an analyst at Natixis Securities, advises investors not to buy L’Oreal shares only on speculation that Nestle will sell its stake.
“I’m not sure L’Oreal is ready to spend 20 billion euros just to buy back shares,” said Tegner, who rates L’Oreal shares neutral and recommends buying Nestle stock. “I don’t think it is something so positive to play for L’Oreal. Every time there is a big deal, you buy the seller and you sell the buyer.”
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. Sanofi rose 1.8 percent to 71.99 euros today in Paris.
Analyst opinion is still divided on what Nestle might do with its L’Oreal stake. Bank Vontobel AG analyst Jean Philippe Bertschy said Feb. 8 he believes Nestle will hold the stake, as selling “would be very short-term oriented, and not really Nestle-like.”
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 decided instead to focus on nutrition and health, according to the company’s official history. In addition to his Nestle role, Brabeck is a vice-chairman of L’Oreal’s board of directors.
“If Nestle is a seller of L’Oreal, it will beg the question of what’s next for the company given Brabeck’s own vision of the future in the past, which included a desire to link up into personal care,” Nomura analyst David Hayes said in an e-mail yesterday.
Should Nestle sell the stake and make an acquisition, one potential target could be closely held Ferrero SpA, the Italian chocolatier that makes Nutella hazelnut spread. Buying Ferrero - - which could cost about 22.5 billion Swiss francs -- would make Nestle the world’s biggest confectionery company, UBS AG estimated in November. Nestle CEO Paul Bulcke declined to comment in October on any interest to buy Ferrero after an article in Repubblica that the companies were in preliminary stages of talks.
“Ferrero remains very interesting,” Alain-Sebastian Oberhuber, an analyst at MainFirst, said in an e-mail. “Nestle would like to have a premium chocolate brand and Ferrero at the moment does not have clear leadership.”
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