Nestle’s 40 Years With L’Oreal Said to Turn on Investors

Nestle SA and L’Oreal SA began a partnership in 1974 out of fear France’s government might nationalize the cosmetics company. Forty years later, L’Oreal is slowly unraveling itself from the grip of its Swiss partner.

L’Oreal, the world’s largest cosmetics maker, said Feb. 11 it agreed to buy back 8 percent of its stock from Nestle, the first sale of the shares by the Swiss company. Nestle will still own 23.3 percent of L’Oreal following the sale.

The $8.2 billion deal was pushed by Nestle’s bigger shareholders, who wanted to find a way to unlock the longheld stake, said two people familiar with the matter. The transaction comes amid a Europe slowly recovering from a financial crisis and as Nestle yesterday posted its slowest sales growth in four years as spending in the region stagnated.

“When there are shocks to economies and there are increased opportunities, those are the times that you are most likely to see a re-framing of the map of ownership across European companies,” said Colin Mayer, a professor of management studies at Said Business School at Oxford.

The timing of the sale was set to coincide with this week’s earnings announcements after each side struck a breakthrough agreement on price and valuation on their Galderma skincare joint venture. Bloomberg News on Feb. 7 said Nestle was exploring ways to reduce its stake. L’Oreal will pay 3.4 billion euros ($4.7 billion) in cash and exchange its stake in Galderma.

Nestle shares fell 0.8 percent to 65.60 Swiss francs at 11:38 a.m. in Zurich, declining for the second straight day. L’Oreal shares retreated 0.6 percent to 122.75 euros in Paris.

2011 Declaration

The roots of the sale go back to 2011 when Nestle Chairman Peter Brabeck-Letmathe, now 69, said the company would make a decision on the L’Oreal stake in 2014.

Starting around last April, large Nestle shareholders began asking why the stake wasn’t being sold so that proceeds could go back to holders as dividends or buybacks, said one of the people, who asked not to be identified because the talks were confidential. Nestle management then pushed L’Oreal for talks, a conversation that L’Oreal executives welcomed, the person said. A Nestle official declined to comment.

Norges Bank, Vanguard Group and Blackrock Inc. are among the largest shareholders of both companies, according to data compiled by Bloomberg.

Talks Progress

Negotiations began around May and accelerated in recent weeks as about 20 advisers and senior managers met to hammer out valuations and revise the shareholder agreements, with many of the high-level talks taking place at Nestle’s Vevey headquarters on Lake Geneva, the people said.

The timing of the deal, among the top 10 announced so far this year, was also spurred by the April expiry of restrictions in a shareholder agreement between Nestle and the Bettencourt Meyers family, one of Europe’s richest, which founded L’Oreal more than 100 years ago.

The family’s holding in L’Oreal will rise to 33.31 percent after the sale, from 30.6 percent. The fortune of Liliane Bettencourt, the 91-year-old daughter of L’Oreal founder Eugene Schueller, is valued at $32.6 billion. She was declared mentally unfit three years ago and her assets put in the care of her family.

Oil Crisis

After Schueller’s death, Francois Dalle became CEO. Georges Pompidou, the French president at the time, told Bettencourt in 1969 during a visit to her villa that the company needed a partner.

Five years later, concerned by a French Socialist party platform that called for the government to take over the nation’s leading companies, Dalle arranged the agreement with Nestle to swap about 26 percent of L’Oreal shares for a 4 percent stake in the Swiss company. Nestle, today the world’s largest foodmaker, was a ready partner as it was struggling with a Europe ravaged by the oil crisis, inflation and volatile foreign-exchange rates.

While both companies say they’re committed to Nestle as a part owner for now, they are separately embarking on an expansion strategy around health care and reaching 1 billion new customers, respectively.

The agreement will “provide L’Oreal with better freedom to build its future, blaze its own trail, do things its own way, and also continue with this beautiful adventure in full independence,” L’Oreal Chief Executive Officer and Chairman Jean-Paul Agon said at a Paris briefing.

Speculation History

Speculation around the future of Nestle’s holding in the company, which has generated about 10 percent of the Swiss company’s net income, has persisted since 2000. Brabeck-Letmathe then proposed a stronger push into cosmetics via taking a majority stake in L’Oreal and other acquisitions. The board deemed that too ambitious and Brabeck-Letmathe decided instead to focus on nutrition and health, according to the company’s official history. Brabeck-Letmathe became chairman in 2005 after having been CEO of Nestle since 1997.

While Nestle emphasized that its L’Oreal stake has a strategic as well as a financial component and is in for the long term, some analysts expect a further unwinding of the relationship. Nestle’s board seats will drop from three to two as part of this week’s deal.

“If something is strategic, does one sell 8 percent of it and lose a board seat? No,” said analysts at Exane BNP Paribas including Jeff Stent and Eamonn Ferry, who believe that the remainder of the stake “will, in time, be sold to part finance a material acquisition.”

Lazard, Rothschild

Nestle is struggling to sustain historic growth rates -– it yesterday said growth this year will be near the low end of its long-term target -- as shoppers the world over switch to eating fresher foods.

“The consumer has changed,” said Brabeck-Letmathe at the briefing. “If you want to assure long-term leadership you have to track with the consumer.”

Lazard Ltd.’s Matthieu Pigasse, based in Paris, and Ken Jacobs advised L’Oreal. Jacobs built a relationship with L’Oreal’s Agon, who ran L’Oreal USA and was based in New York from 2001 until 2005. BNP Paribas SA was cited by Agon as an adviser.

Nestle worked with Rothschild’s Olivier Pecoux. Zaoui & Co., run by brothers Michael and Yoel, advised the Bettencourt Meyers family, their first announced deal since creating the firm last year.

Nestle said the shareholder agreement with the Bettencourt Meyers family still stands, after modifying the level of the stakes of both parties and reducing the number of Nestle representatives on the L’Oreal board to two from three. The agreement places limitations on both sides from being able to raise their stakes until six months after the death of Liliane Bettencourt.

One investor that L’Oreal should get used to having around: the Bettencourt Meyers. The family never plans to sell shares in L’Oreal, a person familiar with the matter said.

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