L’Oreal Jumps as Agon Keeps Nestle Stake Buyback Option Open

L’Oreal SA, the world’s largest cosmetics maker, rose the most in three years in Paris trading as the company kept open the option of buying back the 29 percent stake held by Nestle SA and profitability improved.

The shares gained as much as 6.2 percent to 130 euros, the steepest intraday gain since August 2010. That boosted L’Oreal’s market value to almost 79 billion euros ($105 billion).

The maker of Lancome mascara has “considerable financial resources” including cash and a stake in French drugmaker Sanofi that enable it to consider all opportunities, Chief Executive Officer Jean-Paul Agon said at a meeting with analysts and reporters. He spoke after L’Oreal reported a 7.7 percent increase in first-half earnings.

As of April, Nestle will be able to sell its stake to a third party without having to offer it first to the billionaire heirs of L’Oreal’s founder. L’Oreal shares have been boosted by speculation that the French company may buy back the holding, a move that would be “significantly accretive” to earnings, according to Andrew Wood, an analyst at Sanford C. Bernstein in Singapore.

“We are not fully convinced this will happen,” Wood said in a note today. He rates L’Oreal underperform.

Nestle Review

Nestle is considering all options for its L’Oreal stake, including the status quo, Handelszeitung reported Aug. 28, citing an interview with Chairman Peter Brabeck-Letmathe.

L’Oreal shares were up 4.7 percent at 128.20 euros as of 1:39 p.m. Nestle rose 0.5 percent to 60.90 Swiss francs.

“It seems to me perfectly normal” that Nestle should be reviewing all its options, said Agon, declining to comment on his preferred outcome.

L’Oreal has cash that is “there to be used,” he said. The company is confident there will be opportunities and may use its 9 percent stake in Sanofi to help fund them, he said. That holding is worth about 8.8 billion euros at current prices, according to data compiled by Bloomberg.

Sanofi shares fell as much as 1.2 percent and were trading down 0.6 percent at 73.61 euros as of 1:39 p.m.

First-half operating income climbed to 2.04 billion euros, Paris-based L’Oreal said yesterday after markets closed, compared with the 2.03 billion-euro median estimate of eight estimates compiled by Bloomberg.

Magic Purchase

Operating profit as a percentage of sales reached 17.4 percent, a record for a six-month period. The maker of Maybelline is benefiting from growth in developing regions such as Asia-Pacific and Latin America. The company this month agreed to buy Magic Holdings International Ltd., the top-selling facial-mask brand in China, where Euromonitor estimates beauty and personal-care product sales will expand 8 percent this year.

L’Oreal said it’s confident in its ability “to once again outperform the market and to achieve a further year of growth in sales, results and profitability.”

The company said it expects the global beauty-market growth to slow to about 3.5 percent to 4 percent this year.

Profitability widened in all divisions in the first half, the company said. Margin expansion was led by gains in the consumer-products unit, whose operating profit was 20.8 percent of sales compared with 19.9 percent a year earlier.

“The mass cosmetics business had such a good margin, which is pretty exceptional in staples,” said Rahul Sharma, managing director of Neev Capital in London. Beauty is a category “where you still have some pricing power,” while L’Oreal is benefiting from its exposure to fast-growing markets, he said.

First-half sales rose 4.7 percent to 11.7 billion euros, L’Oreal reported July 16.

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