Nestle Teasing L’Oreal Exit Spurs Deal Dreams: Real M&A

Nestle SA loosening its grip on L’Oreal SA is prompting speculation that the Swiss food maker may eventually sell more of its remaining stake of about $22 billion to generate funds for deals.

Nestle is selling 8 percent of its holding in L’Oreal in exchange for $4.6 billion in cash and L’Oreal’s stake in the companies’ Galderma skin-care joint venture. The move is probably just the first step toward eventually disposing of its remaining L’Oreal position, valued yesterday at about $22 billion, which would give Nestle more firepower for acquisitions, said Gamco Investors Inc. Nestle already had $6.7 billion in cash before the stake sale, according to data compiled by Bloomberg.

“If the right opportunity were to come along, quite possibly they could partially use or wholly use the L’Oreal stake to finance that,” Jeff Stent, a London-based analyst at Exane BNP Paribas, said in a phone interview. “There are a handful of names that pop out.”

Targets for the $240 billion company might include chocolate companies Ferrero SpA or Hershey Co., Stent said. High-margin businesses such as Enfamil baby-formula maker Mead Johnson Nutrition Co. are other possible candidates, said Liberum Capital Ltd. Even $30 billion cereal giant General Mills Inc. could be an option, Gamco said.

Making Deals

After owning a stake in L’Oreal for four decades, this it the first time Nestle is reducing the holding. Nestle, whose number of seats on L’Oreal’s board will drop to two from three, said it intends to use proceeds for a share-repurchase program. It’s also examining acquisitions and may look at areas including skin care, according to a person familiar with the situation.

Peter Brabeck-Letmathe, Nestle’s chairman, said this week that the company considers its remaining L’Oreal stake to be “strategic” and that it will be held for the long term. Robin Tickle, a spokesman for Vevey, Switzerland-based Nestle, declined to comment on the possibility of further reducing its ownership or using the money for acquisitions.

Nestle has been the world’s most acquisitive food manufacturer in the last three years, with 21 deals totaling about $18 billion, according to data compiled by Bloomberg. It has also shown a willingness to attempt large, complicated transactions. In 2012, Nestle bought Pfizer Inc.’s infant-nutrition unit for about $11.9 billion, after selling assets to overcome antitrust concerns.

Nestle shares fell 1.5 percent today to 66.10 Swiss francs in Zurich trading after the company reported the smallest annual sales advance in four years.

Food Focus

While Nestle will now have full control of the Galderma dermatology business, food and beverage products are probably going to continue to be the company’s focus, according to Kevin Dreyer, an associate fund manager at Gabelli Funds, part of Gamco. The Rye, New York-based firm oversees about $47 billion and owns Nestle stock.

Nestle could seek acquisitions in the confectionery industry where it’s currently the third-largest manufacturer, behind Mondelez International Inc. and Mars Inc., said Stent of Exane BNP Paribas.

Ferrero, Lindt & Spruengli AG and Reese’s peanut-butter cup maker Hershey could all be targets, Stent said. He estimated Hershey could fetch about $30 billion in a sale, while Lindt could draw about $14 billion and Ferrero could be valued at about $31 billion.

Ferrero, which also makes Nutella hazelnut spread, would be the most logical candidate among chocolate makers and would give Nestle a stronger presence in the premium chocolate market, according to Alain-Sebastian Oberhuber, a Zurich-based analyst at MainFirst Holding AG.

‘Nice Fit’

“They are very well-known in the biggest chocolate market, which is the U.S., and they have very well-known brands in Europe as well,” Oberhuber said in a phone interview. “It’s also a brand which could be leveraged much better in the emerging markets. That could be a nice fit for Nestle.”

Ferrero Chief Executive Officer Giovanni Ferrero “categorically denies that the company has received any acquisition proposals from another group within the confectionery sector and confirms that Ferrero is not for sale to anyone,” according to an Oct. 17 statement issued after reports that Nestle had tried to buy the maker of Ferrero Rocher chocolates. A representative for the Italian company yesterday referred to the statement and confirmed Ferrero’s position.

A spokeswoman for Kilchberg, Switzerland-based Lindt referred to the company’s statement of beliefs, which says in part that the company wishes “to remain in control of our destiny.”

A representative for Hershey, Pennsylvania-based Hershey didn’t respond to a request for comment.

Baby Formula

Nestle should also consider adding to its infant nutrition offerings with a takeover of Mead Johnson, a $16 billion company, or the baby formula unit of Abbott Laboratories, said Pablo Zuanic, a New York-based analyst at Liberum. The company has plenty of resources even without the sale of the L’Oreal stake to do deals, Zuanic said.

“There is room for them to be more aggressive in other markets in baby nutrition,” Zuanic said in a phone interview.

Danone, the world’s biggest yogurt maker, is weighing the sale of its medical nutrition unit, according to a person familiar with the matter.

Chris Perille of Glenview, Illinois-based Mead Johnson declined to comment. Scott Stoffel, a spokesman for Abbott, said the company isn’t divesting its baby-formula unit.

Health Assets

Merck & Co. has received expressions of interest in its over-the-counter health-products unit from potential suitors waiting to see if it fails to reach an agreement with Novartis AG on an asset swap, according to people familiar with the matter. The division could be a good fit for Nestle, said David Winters, CEO at Wintergreen Fund Inc., which oversees $2.2 billion including Nestle shares.

“As the pharmaceutical companies focus on their core businesses, they certainly are looking at divesting consumer assets,” Winters said in a phone interview. “If Nestle can buy them at the right price and integrate them, and they have all this cash, it makes lots of sense, whether it’s Merck or something else.”

Kelley Dougherty, a spokeswoman for Whitehouse Station, New Jersey-based Merck, said the company doesn’t comment on deal speculation. Merck is exploring strategic options for its consumer-care and animal-health businesses and expects to complete the process and take any action in 2014.

General Mills

General Mills, the maker of Cheerios and Progresso soup, would be another logical target for Nestle, said Dreyer of Gamco. A deal probably won’t happen in the immediate future given that Nestle isn’t receiving a large influx of cash that it needs to quickly use, though it’s possible in a few years, he said.

The brands “are complementary to Nestle’s and fit Nestle’s strategic goals of being the leader in health, wellness and nutrition,” Dreyer said in a phone interview. “General Mills is a good business with very high margins and they’re a big a free cash flow generator.”

Mike Siemienas, a spokesman for General Mills, said the company doesn’t comment on speculation.

This week’s transaction doesn’t necessarily signal that Nestle’s going to make acquisitions any time soon, Zuanic at Liberum said.

Even so, Nestle isn’t the type of company to just buy back shares forever, and it will probably seek a sizeable deal eventually that it can finance in part through a sale of the rest of the L’Oreal stake, said Stent of Exane BNP Paribas.

“I don’t believe you would sell 8 percent of a company that you’ve held for decades and you would give up a board seat if it truly had been a strategic holding,” the analyst said. “The actions speak louder than words.”

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