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PARIS — The waiting game is over — at least for now.
This story first appeared in the February 12, 2014 issue of WWD. Subscribe Today.
After long-standing speculation over what Nestlé would do with its significant stake in L’Oréal, the two companies said Tuesday that the French beauty giant plans to buy 48.5 million of its shares from Nestlé. To help pay for the deal, L’Oréal will sell Nestlé its 50 percent holding in Swiss dermatology pharmaceuticals company Galderma.
The complex transaction will reduce Nestlé’s stake to 23.3 percent of L’Oréal’s share capital from 29.4 percent. At the same time, it will boost the stake held by the Bettencourt Meyers family — descendants of L’Oréal’s founder — to 33.31 percent from 30.6 percent.
The disposal of Galderma for an enterprise value of 3.1 billion euros, or $4.23 billion, will be paid by Nestlé via 21.2 million L’Oréal shares. L’Oréal will buy the remaining 27.3 million of its shares held by Nestlé for 3.4 billion euros, or $4.64 billion, in cash.
Speaking early Tuesday at a press conference at his firm’s headquarters in the Paris suburb of Clichy, Jean-Paul Agon, L’Oréal chairman and chief executive officer, said the agreement will allow the company to focus entirely on its core cosmetics activity. He explained that the business of Galderma, an equal-part venture created in 1981, differs from L’Oréal’s, with practically no synergies.
Agon described Nestlé as having always been an extremely loyal shareholder.
Nestlé chairman Peter Brabeck-Letmathe revealed Galderma is to serve as the foundation of a new company, called Nestlé Skin Health SA. He added that given new accounting rules, a venture like Galderma could no longer be consolidated by Nestlé and L’Oréal, except for a line at the end of the income statement.
Brabeck-Letmathe discussed the importance of Nestlé’s stake in the French beauty giant, saying it’s a financial involvement “but also strategic with a long-term interest.”
He said the change in Nestlé’s stake in no way represents the first step of a disengagement from L’Oréal, “not at all.”
He continued: “I would like to emphasize that our commitment and support for L’Oréal and our relationship with the [Bettencourt Meyers] family remains stable.”
Brabeck-Letmathe called the relationship “strong.”
L’Oréal and Nestlé will continue their activity with Innéov, which specializes in supplements for skin and hair.
Analysts weren’t impressed by the deal, however, sending the shares of both companies down Tuesday. L’Oréal’s shares fell 3.3 percent to 124.80 euros, or $170.22 at current exchange, while Nestlé’s dipped 0.8 percent to 67 Swiss francs, or $74.59.
News of the buyback came a day after L’Oréal’s stock climbed 4.5 percent on reports that Nestlé could be looking at ways to scale back its stake in the world’s largest beauty company. Also on Monday, after the bourse closed, the French giant 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 at average exchange for the period, on a 2.3 percent rise in sales to 22.98 billion euros, or $30.52 billion.
“Today’s transaction is a bit of a letdown versus expectations, and we do not think it creates upside for any of the two companies,” said Pablo Zuanic, consumer goods analyst at Liberum, in a research note. “For L’Oréal, the transaction’s EPS [earnings per share] accretion was already in yesterday’s share price jump, and the new shareholder structure prevents them from further share buybacks ([with the] Bettencourts already at the one-third threshold); moreover, given Nestlé’s apparent renewed long-term commitment to L’Oréal.…L’Oréal is less in play.”
Some analysts lauded the agreement, though.
In a note in which Vontobel Research confirmed its buy rating on Nestlé, the bank said: “Although the timing is surprising, it looks like a win-win deal: Nestlé can strengthen its Nestlé Health Science strategy and free up some cash to finance a buyback, and in the same time can hold up to a 23.3 percent stake in L’Oréal.”
Bernstein Research was also upbeat, saying in its note: “Our net conclusion is that this transaction is positive for both L’Oréal and Nestlé…”
Bernstein said given that the transaction leaves Nestlé with a sizable stake in L’Oréal, “this could keep the long-standing ‘will-they-or-won’t-they-sell-their-stake’ debate alive and kicking.”
The transaction will be accretive by more than 5 percent on L’Oréal’s recurring earnings per share on a full-year basis.
The financing won’t require the selling of L’Oréal’s 9 percent stake in Sanofi, the French pharmaceutical concern whose 2013 sales were 32.95 billion euros, or $43.76 billion at average exchange for the 12-month period. L’Oréal is buying its shares back from Nestlé at a price per share of 124.48 euros, or $169.78, which is the average L’Oréal stock closing price between Nov. 11 and Feb. 10. The shares the company buys back are to be canceled.
During a financial analysts’ meeting later Tuesday morning, Agon referred to L’Oréal’s strong 2013 cash flow, which was up 6.7 percent year-over-year to 3.91 billion euros, or $5.19 billion.
Reflecting the change in Nestlé’s stake, the Swiss company will have two — rather than three — board representatives at L’Oréal. Further, the ownership ceiling provisions of the shareholders’ agreement between Nestlé and the Bettencourt Meyers family will apply to their respective new holdings, the companies said.
L’Oréal’s existing shareholder agreement stipulates that neither Nestlé nor the Bettencourt Meyers family can increase their stakes during the lifetime of Liliane Bettencourt, the daughter of the company’s founder — who is now 91 — and the mother of Françoise Bettencourt Meyers, and during the six months after her death. However, the parties are free to sell their shares, each of them having conceded the other right of first refusal until April 29. Following that date, the parties may offer the stakes to any third entity.
“The Bettencourt Meyers family and Nestlé will continue to act in concert with respect to L’Oréal for the remaining duration of the shareholders’ agreement,” the Bettencourt Meyers family and Nestlé said in a joint statement.
“L’Oréal’s new shareholder structure will strengthen the Bettencourt Meyers family’s position in the capital of the company,” the family said, adding it “reiterates its commitment and loyalty towards L’Oréal, as well as its continued support of the company in the long term. The family also reaffirms the quality of its relationship with Nestlé built on mutual respect over the last 40 years.”
The family spoke of its confidence in Agon and L’Oréal’s employees, as well.
The L’Oréal-Nestlé transaction is expected to close by the end of June.
Agon, at the analyst meeting, said L’Oréal is facing this year with “confidence” and “determination despite the economic backdrop that remains unstable [and] unpredictable.”
The company expects the global cosmetics market’s growth to be in the same order as 2013’s — between 3.5 and 4 percent.
“The currency effect should once again in 2014 be unfavorable for us, [but] we are less exposed than others to certain countries that have suffered strong devaluations in their currency,” said Agon. He said L’Oréal’s sales growth probably won’t be uniform across the four quarters, that the first quarter’s gains should be lower than the annual average due to a strong on-year comparison in the United States.
Agon reiterated the company’s confidence in its ability to outperform the market and achieve another year of sales and profit growth.