Deals

Andrea Felsted is a Bloomberg Gadfly columnist covering the consumer and retail industries. She previously worked at the Financial Times.

Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

The death of heiress Liliane Bettencourt should force L'Oreal SA and its major shareholders to agree on the best ownership structure for the French cosmetics group. This historical juncture provides Nestle with an opportunity for a graceful exit from its 23 percent holding.

An agreement between the Bettencourt family, which owns 33 percent, and Nestle not to increase their stake in L'Oreal expires in six months. In theory, that opens the way for Nestle SA to buy all of L'Oreal. But as Gadfly has argued, this would be a huge and risky deal.

Strategically, a transaction would bolster Nestle's skincare assets but do nothing for its primary business of food and nutrition. Buying the remaining 77 percent would cost a chunky 100 billion euros ($120 billion) after adding a takeover premium -- and that's assuming the Bettencourts would sell. Worse, there's a risk that Nestle would be buying just as the cosmetics boom is at its peak.

It's far better for Nestle to sell. The group has been free to offload its stake to a third party since 2014, so Bettencourt's passing changes nothing on this front technically.

But there is now a neutral pretext for Nestle to review the L'Oreal holding at a time when Dan Loeb's Third Point, which has amassed a $3.5 billion stake in the Swiss group, is pushing for CEO Ulf Mark Schneider to divest it. So far, Schneider has played his cards close to his chest.

What's more, with the Bettencourts soon free to raise their stake, he has more potential buyers. There are essentially three: L'Oreal, the Bettencourts and the market.

The stake is currently worth about 24 billion euros. Analysts at Raymond James say L'Oreal could buy about 10 billion euros worth before hitting regulatory constraints. The French group could easily afford it, having no debt and a 9 percent stake in Sanofi to play with if it didn't want to gear up.

Cash Rich
L'Oreal has the financial firepower to buy all or part of Nestle's stake
Source: Bloomberg

Such a move would boost the cosmetics group's earnings per share, as Bloomberg Intelligence observes. This prospect, coupled with possible bid speculation, pushed L'Oreal shares up 3.5 percent on Friday.

New Look
Investors are betting that L'Oreal's ownership structure will now be reassessed
Source: Bloomberg
Intraday times are displayed in ET.

The remainder of the Nestle stake could be split between a stock market placing and, possibly, the Bettencourts if they were minded to increase their holding.

Perhaps the biggest issue is what Nestle does with the money. Even with a recently announced $21 billion buyback, net debt to Ebitda will be only 1.5 times in 2020 -- and that's before any potential disposals.

Schneider could use the proceeds to be more aggressive in doing M&A to address Nestle's growth challenges -- or fund a more generous cash return to shareholders. It’s a nicer problem to have than constantly justifying the L'Oreal stake.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the authors of this story:
Andrea Felsted in London at afelsted@bloomberg.net
Chris Hughes in London at chughes89@bloomberg.net

To contact the editor responsible for this story:
James Boxell at jboxell@bloomberg.net