L'Oréal Would Pay to Disentangle Itself From Nestlé -- Update
February 09 2018 - 10:55AM
Dow Jones News
By Matthew Dalton and Saabira Chaudhuri
PARIS--Cosmetics giant L'Oréal SA said it has the financial
firepower to buy the roughly $27 billion worth of its stock held by
Nestlé SA, opening the door to negotiations over how to decouple
two of the world's biggest consumer-goods companies.
"If one day Nestlé decides that they want to sell part of their
shares or their shares, obviously we would be a buyer," said
L'Oréal Chief Executive Jean-Paul Agon in an interview. "And
obviously, we would buy them to cancel them."
"It would be very accretive," Mr. Agon added.
The sale would end a decadeslong relationship that stabilized
L'Oreal's shareholder structure and delivered years of strong
returns for Nestlé. It would also cement control of L'Oréal for
Françoise Bettencourt Meyers, the only child of the late L'Oréal
heiress Liliane Bettencourt. Ms. Bettencourt Meyers and her
children, who currently own 33% of the shares, would see their
stake rise to 43% if the sale and share cancellation were to go
through.
Nestle's longstanding stake in L'Oréal has come under scrutiny
since Daniel Loeb, the activist investor who built up a 1.3% stake
in Nestlé last year, launched a campaign to get the Swiss
consumer-goods company to sell its L'Oréal shares. Mark Schneider,
Nestlé's new chief executive, has so far batted away Mr. Loeb's
suggestions, saying that L'Oréal is a good investment. He hasn't,
however, ruled out selling the stake.
Nestlé declined to comment.
Ms. Bettencourt's death last year has also raised questions
about Nestlé's ownership. Her heirs and Nestlé have an agreement
that prevents either party from increasing its stake in L'Oréal
until six months after Ms. Bettencourt's death--though there is an
exemption if either stake rises because the number of shares
outstanding has fallen. The six-month period expires on March
21.
Nestlé, the Swiss consumer-goods giant, and L'Oréal, the world's
biggest cosmetics company, have been intertwined since 1974, when
Ms. Bettencourt, heiress to the L'Oréal cosmetics fortune, swapped
a large slice of L'Oréal for shares in Nestlé to fend off a feared
nationalization by the French state.
To finance the purchase, L'Oréal has a cash pile that rose to
EUR3 billion ($3.7 billion) from EUR1.8 billion over the course of
last year. It also has a stake in pharmaceutical company Sanofi SA
worth around EUR7.6 billion that it could sell to fund the
buyback.
"In case that would not be enough, we've got many love letters
from great banks that said they would love to lend us some money,"
Mr. Agon said.
Martin Deboo, an analyst at Jefferies in London, said L'Oréal
has the cash flow to take on debt for the transaction.
"They would deleverage from there quite quickly. It would not be
a crazy thing to do for their balance sheet," Mr. Deboo said.
L'Oréal on Thursday reported that revenue rose 4.8% last year to
EUR26 billion, excluding one-off deals like last year's sale of the
Body Shop. While its luxury brands grew strongly, the company has
struggled to drive sales of older mass-market brands such as Revlon
and Maybelline.
Mr. Loeb has repeatedly called on the Nestlé to sell its 23.29%
stake in L'Oréal, saying shareholders should be allowed to choose
whether they want to invest in the French beauty company.
"For them it's a nice ringfenced, passive store of value," Mr.
Deboo said. "And I don't think they're in any rush to dispose of
it."
Mr. Loeb has suggested the L'Oréal stake could be exchanged for
Nestlé shares, saying this method would immediately flatter
Nestlé's return on equity and increase its share value as per-share
earnings received a boost from the reduced share count.
Nestlé has been criticized by Mr. Loeb and other investors for
having something of an identity crisis. The company sells
everything from chocolate and bottled water to skin cream and
medicinal foods.
Last month, Mr. Loeb in a quarterly letter to investors,
reiterated his call for Nestlé to sell its piece of L'Oréal saying
it is unclear how a minority stake in the beauty business
contributes to Nestlé's stated aim as being a nutrition, health and
wellness company.
"We continue to believe that this financial investment ought to
be monetized and that there are better uses for this capital,"
wrote Mr. Loeb.
Write to Matthew Dalton at Matthew.Dalton@wsj.com and Saabira
Chaudhuri at saabira.chaudhuri@wsj.com
(END) Dow Jones Newswires
February 09, 2018 10:40 ET (15:40 GMT)
Copyright (c) 2018 Dow Jones & Company, Inc.
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