How Third Point's Nestlé Move Could Affect L'Oréal
June 26 2017 - 12:55PM
Dow Jones News
By Nick Kostov
Is Nestlé SA's stake in L'Oréal SA in play?
Daniel Loeb's Third Point hedge fund on Sunday disclosed a $3.5
billion stake in Nestlé, amounting to about 1.25% of the company.
It is demanding a series of moves to boost shareholder return,
including a review of the Swiss food giant's EUR24.4 billion, or
about $27.4 billion, stake in French cosmetics firm L'Oréal.
Nestlé hasn't commented specifically on its intentions but said
in a brief statement Monday that it " remained committed to
executing our strategy and creating long-term shareholder value."
The company's newly installed chief executive, Mark Schneider, has
made a number of big moves in recent months amid flagging
growth.
Shares of Nestlé rose 4% Monday after news of Mr. Loeb's
investment, adding pressure on Mr. Schneider to take action. Shares
of L'Oréal were up 3.9%.
Nestlé and France's Bettencourt family, heirs of L'Oréal founder
Eugène Schueller, held roughly equal stakes in the cosmetics giant
for decades. In 1974, the family sought an outside investor amid
fears at the time over French government nationalization.
For almost as long, the two companies have resisted pressure
from analysts and investors to decouple. Critics complain the two
don't share common strategic goals and would be better
untethered.
In 2014, L'Oréal bought back 8% of shares held by the Swiss
company in exchange for cash and part of their dermatologic joint
venture, Galderma. As part of its partial retreat, Nestlé gave up
one of its three board seats, but continued to own 23% of L'Oréal.
All that raised new questions about whether Nestlé would remain a
major shareholder much longer.
In recent quarters, L'Oréal has pulled away from competitors in
terms of organic sales growth by investing in the marketing of its
brands, which include Yves Saint Laurent Beauté, Kiehl's and
Garnier. But the investment has affected margins growth, which has
lagged behind historical levels. Many of its rivals, meanwhile,
have been cutting costs to boost profits.
If Nestlé does move to rid itself of L'Oréal shares or further
cut its stake, there are several ways it could do that. An outright
sale might be difficult, considering the size of its stake, which
is currently worth $27.4 billion -- a big price tag for
noncontrolling ownership.
Although Nestlé has an agreement with the Bettencourt family
setting rules on what it can do with its stake, some of those
provisions expired in 2014. Nestlé, for example, no longer needs to
offer the shares first to the Bettencourts if it decides to sell
them.
Nestlé could offer the L'Oréal shares in exchange for Nestlé
ones, as per Mr. Loeb's suggestion. Or, a more likely option,
L'Oréal could simply buy back Nestlé's stake.
To do so, it may need to sell some of its shares of French
drugmaker Sanofi SA. L'Oréal's Sanofi stake was worth about EUR10.4
billion as of Friday's close. L'Oréal Chief Executive Jean-Paul
Agon has long said that the Sanofi investment, which the company
took on after merging pharmaceutical business Synthélabo with
Sanofi in 1999, is financial, not strategic.
L'Oréal spokespeople declined to comment on the company's
intentions. A spokeswoman for Sanofi also declined to comment.
"Financially, if L'Oréal wants to buy it all, they can afford to
do it," said Marion Boucheron, an analyst at financial-services
firm Raymond James. "The question is whether it's in their best
interest strategically, rather than investing in other assets."
Write to Nick Kostov at Nick.Kostov@wsj.com
(END) Dow Jones Newswires
June 26, 2017 12:40 ET (16:40 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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