French cosmetics firm L’Oréal is buying 8 per cent of its shares from Swiss food group Nestlé for €6.5-billion ($9-billion), loosening their 40-year partnership and allowing both firms to boost earnings per share.
However, Nestlé said on Tuesday the deal was not the start of a full exit from L’Oréal, leaving some uncertainty over the future of its remaining 23 per cent stake in the maker of Garnier shampoo and Lancome creams.
“This transaction is a bit of a letdown,” Liberum Capital analysts said in a note, referring to media reports that L’Oréal might buy a larger proportion or even all of Nestlé’s stake.
“We assume speculation may continue regarding Nestlé’s future plans. Sell to a third party? Sell more in the future to L’Oréal?”
At 0940 GMT L’Oréal shares, which had leapt on Monday on speculation of a larger stake purchase, were down 2 per cent at 126.4 euros. Shares in Nestle, home to Gerber baby food and Kit Kat chocolate bars, were down 1 per cent at 66.9 Swiss francs.
“I do not see this as a first step of leaving L’Oréal ... not at all,” Nestlé Chairman Peter Brabeck told reporters, describing the Swiss group’s stake in L’Oréal as “strategic”.
“We are in here for the long haul,” he added.
Nestlé became a L’Oréal shareholder in 1974 to protect the group from being nationalized if the Socialists took power.
Under their pact, Nestlé and L’Oréal heiress, Liliane Bettencourt, the world’s richest woman, promised not to sell their stakes without first offering them to the other until April 29, 2014 – 40 years after the initial deal was signed.
L’Oréal, which on Monday posted forecast-beating quarterly sales, will cancel all the shares it buys from Nestlé, boosting its earnings per share by more than 5 per cent.
However, it will have to wait to buy more shares – if it is offered the opportunity – as French rules put limits on how regularly companies can cancel shares.
The deal will cut Nestlé’s stake in L’Oréal to 23.29 per cent from 29.4 per cent while the Bettencourt Meyers family’s stake in L’Oréal will increase from 30.6 per cent to 33.31 per cent.
L’Oréal Chief Executive Jean-Paul Agon explained how the two European consumer goods groups agreed on the 8 per cent figure:
“Nestlé’s stake reduction had to allow it to remain a strategic shareholder ... while making sure that the Bettencourt family stayed below the 33.33 per cent level.” Beyond that level, the family would have to make an offer for the rest of L’Oréal’s share capital.
The deal will be funded by €3.4-billion in cash and the sale by L’Oréal to Nestlé of its 50 per cent stake in their Galderma dermatology joint venture for €3.1-billion including debt, paid by Nestlé in L’Oréal shares Nestlésaid it would use the cash proceeds to launch a share buyback, without disclosing details.
“In reality, I think it is as close to maintaining the status quo as politically possible given L’Oréal’s desire to take some of the stake back and the fact Nestlé didn’t need to sell,” Jon Cox, analyst at Kepler Cheuvreux said.
The Swiss group, which has been developing its health and wellness operations in recent years, is trying to maximize its use of capital and dispose of non-core assets.
The price per L’Oréal share used for the transaction is 124.48 euros, corresponding to its average closing price between November 11, 2013 and February 10, 2014.
L’Oréal said the deal would not involve selling its 9 per cent stake in drugmaker Sanofi <SASY.PA>, worth $12-billion. Sanofi shares fell 1.4 per cent. Analysts believe Sanofi could have boosted earnings by buying back L’Oréal’s stake.
In order to reflect the change of Nestlé’s stake in L’Oréal’s governance, the number of Nestlé representatives on L’Oréal’s board of directors will be cut from three to two.