PARIS — L’Oréal shares climbed 4.5 percent Monday following reports that major shareholder Nestlé could be looking at ways to cut its 23.9 percent stake in the world’s largest beauty company.
This story first appeared in the February 11, 2014 issue of WWD. Subscribe Today.
The shares rose as L’Oréal reported a 3.2 percent increase in net income in the 12 months ended Dec. 31 to 2.96 billion euros, or $3.93 billion, on a 2.3 percent rise in sales to 22.98 billion euros, or $30.52 billion. Sales climbed 5 percent in like-for-like terms.
Currency conversions were made at average exchange rates for the period.
L’Oréal’s operating profits were up 4.8 percent to 3.88 billion euros, or $5.15 billion, representing 16.9 percent of sales.
Company chairman and chief executive officer Jean-Paul Agon said that despite the general cosmetics market’s more moderate expansion last year, L’Oréal’s pace of outperforming the market accelerated.
“L’Oréal is strengthening its worldwide positions across all divisions and all geographic zones,” said Agon. “The Consumer Products Division, L’Oréal Luxe and the Active Cosmetics Division are maintaining a good momentum, thanks to the performances of their major brands.”
He noted a gradual improvement for the Professional Products Division and that the group’s growth is well balanced geographically.
“In an economic context that is still marked by uncertainties, particularly on the monetary front, L’Oréal is confident in its ability to outperform the market once again in 2014 and to achieve another year of sales and profit growth,” Agon said.
Despite the increase in profits and sales, the main focus of the day was reports that Nestlé might be looking at cutting its stake in L’Oréal. The beauty firm’s stock ended the day at 129 euros, or $175.99 at current exchange.
The company’s existing shareholder agreement stipulates that neither Nestlé nor the Bettencourt family, which owns 30.5 percent of L’Oréal, can increase its stake during the lifetime of Liliane Bettencourt, the daughter of the company’s founder who is now 91, and during the six months after her death. However, the parties are free to sell their shares, each of them having conceded the other the right of first refusal until April 29. Following that date, the parties may offer the stakes to any third entity.
A spokeswoman for L’Oréal had no comment on the report, which was first published by Bloomberg.
“As a matter of principle, we do not comment on market rumors,” a Nestlé spokesman said.
Citing sources, Bloomberg said Nestlé has informed L’Oréal of its intentions, and that it is believed any reduction of its stake, valued at $30 billion, could take years. It also said L’Oréal doesn’t fit Nestlé’s long-term strategy.
The Swiss company has of late divested numerous noncore holdings. In December 2013, for instance, Nestlé said it would sell its 10 percent stake in Givaudan, the fragrance and flavors supplier. It sold most of its share in Jenny Craig to North Castle Partners, as well.
For its part, L’Oréal has the means to purchase Nestlé’s stake. At a financial analysts’ meeting last August, Agon neither confirmed nor denied the company might buy back Nestlé’s holding in the firm. Yet he said L’Oréal had considerable financial wherewithal due to a 9 percent stake in Sanofi, the French pharmaceutical concern whose 2013 sales were 32.95 billion euros, or $43.76 billion at average exchange.
“We will see what the opportunities are to use it, but I am confident there will be opportunities,” Agon said at the time. “We’ve always said that our stake in Sanofi was financial, not strategic. We could use it if an opportunity were to arise.”
Not everyone believes Nestlé will sell its L’Oréal holding.
“Our view has been that Nestlé will retain its stake, and that this will be announced ahead of the [annual general meeting] in April: Nestlé does not really need the cash (for M&A or buybacks), the sale would not be hugely earnings accretive for Nestlé and a stake in L’Oréal provides a long-term option on a move into a hybrid nutrition/cosmetics venture, like Nestlé’s move into nutrition/pharma with Nestlé Health Science,” said Bernstein Research in a note Monday.
“Having said this, it would be remiss of Nestlé not to consider all of its options and discuss some of them with L’Oréal,” Bernstein Research continued. “We continue to believe that Nestlé will retain its stake, although our conviction has been lowered by recent reports, which do suggest ‘no smoke without fire.’”