If Nestlé Sells Its Stake in L’Oréal… Chain Reaction of Share Sales Could Occur With Expiration of Pact in April

If Nestlé Sells Its Stake in L’Oréal… Chain Reaction of Share Sales Could Occur With Expiration of Pact in April


Feb. 10, 2014 12:39 p.m. ET

A knot tying three of Europe’s biggest corporations together could soon be untangled with billions of euros in share buybacks.

In late April, Nestlé SA NESN.VX -0.07% will be free to unwind its 30% stake in L’Oréal SA, and, according to people familiar with the matter, that is one of the options the Swiss food giant is studying. If Nestlé’s stake is up for grabs, L’Oréal wants to buy at least part of it, one of the people said. That could trigger L’Oréal selling its 9% stake in French pharmaceutical company Sanofi SA, SAN.FR +1.78% according to the person.

The outcome of the corporate equivalent of a game of chess will determine who controls L’Oréal, the world’s biggest cosmetics company and home to brands including Lancôme, Garnier and Kérastase. Nestlé and the Bettencourt family, heirs of L’Oréal’s founder, have jointly controlled L’Oréal for four decades.

Given the complexity and the cost, it is possible that the companies will retain their shareholdings in each other. In any case, a deal could take years to conclude.

For Nestlé, its decision on the L’Oréal stake will provide important clues about its strategic future. Three years ago, Chairman Peter Brabeck-Letmathe said that Nestlé’s board had begun to “reflect” on its L’Oréal stake and would make a decision in 2014. Nestlé has sold investments in hotels, fast food and wine, as well as U.S. eye-care business Alcon Inc. to focus on health and nutrition.

“The future of Nestlé’s participation in L’Oréal is an important topic for the Group which the Nestlé Board of Directors is addressing with great attention in the framework of the Group’s global nutrition, health and wellness strategy,” said Nestlé spokesman Philippe Aeschlimann. Nestlé’s 30% stake in L’Oréal is valued at more than €23 billion ($31.36 billion).

L’Oréal, with its aisles of shampoos, face creams and perfumes, doesn’t fit that focus, some analysts say. As a result, Nestlé could gradually reduce its stake, selling at least a chunk of it back to the cosmetics giant. The opposite strategy—expanding Nestlé’s scope by launching a takeover of L’Oréal—is unlikely because it would be expensive and could spark political meddling by the French government, eager to keep L’Oréal’s jobs in France, according to bankers and analysts.

“Nestlé will continue to take a long-term strategic view in shareholders’ best interest, and will, when appropriate, make its decisions in a way that is most conducive to the long term success of the company,” Mr. Aeschlimann said.

Buying back Nestlé’s stake would be “a good deal” for L’Oréal, chief executive Jean-Paul Agon told Le Monde newspaper last month. “The shares would be canceled, so the value of each L’Oréal share would increase,” he said.

A spokeswoman for L’Oréal on Monday confirmed Mr. Agon’s statement and declined to comment further.

To buy back its shares, L’Oréal could cash in its stake in Sanofi, currently valued at about €9 billion. Mr. Agon has long said that the company’s investment, which it inherited when it sold it a pharmaceutical business, is financial, not strategic.

Extending the ripple effect, Sanofi Chief Executive Christopher Viehbacher said the company would consider buying back its own shares. “It would be clearly accretive,” he said.

One of the people familiar with the matter said Sanofi wouldn’t likely buy all of the stake in one fell swoop due to its size. It would either buy it in several installments or buy part of the stake, with L’Oréal releasing the rest on the open market, this person said.

Any sale would mark a major shift in a long-standing corporate pact.

The Bettencourts invited Nestlé into their company in 1974, fearing nationalization from the French government. They became equal partners, with each party holding about 30% of the company and seats on the supervisory board.

The Bettencourts and Nestlé last renegotiated their shareholding pact 10 years ago. They agreed that neither side could increase its stake during the lifetime of Liliane Bettencourt, the 91-year-old matriarch, or for six months following her death. They also committed to giving the other party the first right of refusal if they wanted to sell their shares. The latter pledge expires at the end of April.

The Bettencourt clan is determined to hold on to its stake. Last summer, the family said in a statement that a sale is “not in any way under consideration.”

“It would be remiss of Nestlé not to consider all of its options, and discuss some of them with L’Oréal,” says Sanford Bernstein analyst Andrew Wood, who added that he expects Nestlé to retain its stake. “If any agreement is made it would remove a long-term debate on both companies.”


About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (www.heroinnovator.com), the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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