By and  on September 10, 2010

PARIS — The Bettencourt scandal has ignited a media firestorm in France and engulfed President Nicolas Sarkozy and one of his key ministers — but L’Oréal is likely to emerge unsinged.

Industry experts say the saga, which dates back to December 2007 and concerns the daughter of the French beauty giant’s founder and its largest single shareholder, Liliane Bettencourt, has so far had no impact on L’Oréal’s operations and hardly any negative effect on its image. However, it does raise the specter of a possible change in ownership in the long term and that more unforeseen variables could pop into an already complex equation.

“If the quality of the company’s first-half results is anything to go by, the Bettencourt affair has not had any impact on L’Oréal’s underlying performance,” said Eva Quiroga, an analyst at UBS.

“I don’t think it’s affecting the business in a material way,” concurred Susanne Seibel, a consumer analyst at Barclays Capital.

Dan Dolev, an associate analyst for European HPC at Sanford C. Bernstein & Co. LLC, agreed, saying, “Operationally, they’re actually not hurt.”

Such sentiment echoes that of L’Oréal chief executive officer Jean-Paul Agon, who, during the company’s financial analyst meeting in late August, fielded several questions about the Bettencourt affair.

“My statement on this — and I don’t say much about it, so pay attention to what I say now — is that the Bettencourt affair, while very regrettable, does not have any impact on the company’s bottom line. If there is any doubt about it, the numbers corroborate this,” he said.

L’Oréal’s first-half net profits rose 21.2 percent to 1.32 billion euros, or $1.75 billion at average exchange, on sales that gained 10.2 percent to 9.67 billion euros, or $12.82 billion. And if further proof were needed, L’Oréal stock is up 6 percent this year relative to the MSCI.

“Secondly, if you like, once again there is a family feud that we find highly regrettable because we’re obviously deeply attached to this founding family,” continued Agon, “but there is a company here…world-champion in its business, operating in 60 countries, a workforce of 60,000, doing its job, doing its business, working calmly and seriously, fully focused on its major corporate mission of winning a billion new consumers and focused also on its main objective, which is offering the best cosmetics to men and women around the world. And that’s it really, I can’t say anything more.”

The Bettencourt affair began when Françoise Bettencourt Meyers brought a lawsuit against photographer François-Marie Banier. She alleges he exploited the weakness of her 87-year-old mother and owner of 31 percent of L’Oréal, who gave Banier assets valued at about 1 billion euros, or $1.27 billion at current exchange. Banier denies any wrongdoing, while Bettencourt argues she is sound and acting on her own free will.

But while L’Oréal appears to be operating as if it’s business as usual, some observers say that in the long term the drip, drip, drip of negative media coverage could have some short-term affect on the beauty giant’s image.

“It certainly doesn’t help perception when the main shareholder’s house is searched and her credibility as a French citizen is questioned,” said Seibel. “Also, the company itself has been accused of having handed out a contract to the photographer at favorable terms, [which is] not helpful to p.r. work.”

Seibel was referring to Banier, who reportedly received 710,000 euros, or $902,705 at current exchange, annually from L’Oréal through his company, Héricy.

Agon during the recent meeting said Banier provides a “real service” to L’Oréal but didn’t elaborate, explaining he reserves his response for a legal inquiry.

“Do I think the Bettencourt affair will have a long-lasting effect? It depends on how quickly it’s going to be resolved and what the outcome is,” said Seibel.

Other branding experts maintain the Bettencourt affair is unlikely to have any permanent impact on L’Oréal’s image.

“The Bettencourts are no strangers to scandal, so it seems unlikely that this controversy will have a large, long-term impact on the company,” said Madonna Badger, founder of Badger & Winters Group.

She was making reference to Bettencourt’s husband, André Bettencourt, who in 1995 left L’Oréal’s then holding company Gesparal, where he was president, amid reports that he had been a Nazi sympathizer who’d penned anti-Semitic articles during 21 months, starting in 1940, as an editorial writer for the collaborationist French weekly La Terre Française. The publication was reportedly partially Gestapo-controlled. Bettencourt then joined the Resistance and in February 1995 asked in a public statement for forgiveness from the Jewish community.

“This family feud has spun out of control — largely thanks to the media — but at the end of the day, L’Oréal is continuing to operate and execute,” continued Badger. “Although the family is infamous in France, with the company’s large international presence [in 2009, just 20.9 percent of its total sales were generated in Western Europe], it seems unlikely that their global consumer would associate the brand with the [Bettencourts]. The French love a good scandal, but international interest will soon fade.”

“The issue is so far from the consumer that I doubt it will have any effect,” agreed another branding expert, who requested anonymity. “Financial scandals, as opposed to moral ones, tend not to impact the brand, unless the brand has made ethical purity an important consumer-facing part of the brand’s positioning.

“And this is more about the financial dealings of one member of the L’Oréal board, although the most important one historically for the brand,” he added.

The next development on the legal front is expected to be delivered on Tuesday, when an appellate court in Versailles, France, is due to hand down a decision regarding an appeal filed by Liliane Bettencourt’s lawyer . His appeal opposes the use of supplementary information, largely comprised of secret tape recordings made of conversations between Bettencourt, her advisers and others. The supplementary information was requested by a court in Nanterre, France, for the Banier case.

As for L’Oréal’s iconic image, industry experts agree Agon has been successful in making the company “a great citizen of the world,” which was among his stated goals when taking command of the group four years ago.

As the Bettencourt story unfolds, questions about Nestlé’s intentions regarding its stake in L’Oréal keep bubbling up.

Most recently, the subject made news after Peter Brabeck-Letmathe, chairman of Nestlé — which owns about 30 percent of L’Oréal — made several public statements. He seemed in no hurry to make a decision regarding the Swiss consumer goods giant’s stance, but said in a Swiss newspaper that Nestlé’s supervisory board had asked him to consider what the long-term development could look like. He was quoted as saying, “We haven’t yet decided what we want.”

“For us, this is a nonevent,” said Agon at the analyst meeting of Brabeck-Letmathe’s comments. “I haven’t seen anything new or groundbreaking.”

The principal terms of the shareholder pact between Nestlé and the Bettencourt family are that neither party can increase its stake in L’Oréal during the lifetime of Liliane Bettencourt and for six months after her death. Each of the parties is free to sell its shares and has conceded the other a first right of refusal until April 29, 2014. After that date, the parties can offer the shares to any third party.

Financial analysts are split over whether Nestlé will ultimately take over L’Oréal or sell.

“I’m a fervent believer in the fact that one day Nestlé will look closely at L’Oréal and aim to be closer to L’Oréal than it is today. Nestlé has a lot of cash to redeploy,” said KBL Richelieu Gestion equity analyst Chicuong Dang.

Most recently, in late AugustNestlé made $28.3 billion after selling its remaining shares in Alcon to Novartis.

Dang added Nestlé aims to become bigger in emerging markets and that L’Oréal could be a help.

“Nestlé would be the obvious buyer, given the current shareholder structure,” said Quiroga. “Any buyer from the personal care industry would struggle with either price and/or too much category overlap.”

Helvea analyst Andreas von Arx noted that while synergies between the companies are few, acquisition targets in Nestlé’s food-and-beverage field are limited in the medium term, so the firm may have to look to other segments for expansion.

Meanwhile, industry consultant James Amoroso believes “it is clear that Nestlé will dispose of its L’Oréal stake in due course.

“There is no financial justification for Nestlé to acquire L’Oréal — it would just be empire building at the expense of the shareholder, and Nestlé does not do that,” he continued.

Sanford C. Bernstein’s analysts don’t think Nestlé is a probable L’Oréal buyer, either.

“L’Oréal is noncore to Nestlé if you think about it from [home and personal care] versus food,” said Dolev. “Nestlé is really a food company. So I don’t think they would actually want to get into HPC and buy L’Oréal. It’s going to be very tough to find someone that is big enough to purchase them and, to be honest, I think there’ll be some pressure to keep the company in French hands. The big HPC guys aren’t French. So I can’t see a change in ownership happening in the medium term.”

A lot hinges on Bettencourt Meyers, who has been given her mother’s shares in L’Oréal in bare ownership (while Bettencourt receives dividends and holds voting rights). Bettencourt Meyers has repeatedly stated publicly that she will maintain the status quo regarding her stake in L’Oréal. However, if she ultimately decides to sell, it would set off a cascade of events.

Another hypothetical scenario includes Bettencourt changing her mind about how much she wants to bequeath Bettencourt Meyers, although under French law a parent cannot totally disinherit an offspring.

There’s also the possibility that a French court might ultimately decide Bettencourt is unable to run her businesses and affairs, causing her to need a guardian, which would have implications on her voting rights.

Yet it seems unlikely the Bettencourt affair is impacting Nestlé’s view about its L’Oréal holding.

“It’s a sideshow,” said Amoroso. “It may be slightly embarrassing and annoying, but it has no commercial impact. It won’t make Nestlé move faster or slower in relation to its timetable for disposing of its share. It does no damage to L’Oréal. It’s not even a corporate story. It’s a personal story. It’s all about Mrs. Bettencourt, who happens to be a shareholder. So what?”

It is also highly doubtful there will be a shift in L’Oréal ownership anytime soon, if ever.

“I don’t think that corporate buyers are very eager to purchase a minority stake in a company involved in a pending court case,” said Seibel. “The other thing is also what should they buy: the Bettencourt or the Nestlé stake? If it’s only one of them, then it would be a minority share and that would not be that much of an interest. As long as the court case goes on, I do not think it would be possible to sell L’Oréal.”

Much of the Bettencourt affair has unfolded through leaks strategically placed in some outlets of the French press. The phenomenon reached such a fever pitch it caused a lawyers’ and a notaries’ association — Ordre des avocats de Paris and Chambre des notaires de Paris — to jointly publish in late August a statement lambasting “the damage to professional secrecy by interception, transcription and public disclosure of the contents of conversations between lawyers and notary and their client.”

It’s impossible nowadays to tune into any radio or television station in France without getting a host of up-to-the-minute developments concerning the Bettencourt scandal, which has become an affair of state. On Tuesday evening, for instance, TF1 TV channel aired an interview with Eric Woerth, the embattled labor minister, during which he was raked over the coals regarding his alleged entanglement in the saga.

And earlier in the summer, Sarkozy on national TV sought to refute corruption allegations, calling claims that he may have received envelopes of cash for illegal campaign donations from Bettencourt “shameful.”

With all the hype, not least due to the fact that some of France’s top lawyers — Olivier Metzner, Georges Kiejman and Hervé Temime — are involved in the Bettencourt affair, it’s no wonder that the story has sparked the imagination of at least one moviemaker. Thomas Langmann could start filming as early as next summer a feature film inspired by the Bettencourt story. If all goes according to plan, it’s to be directed by Michel Hazanavicius and called “Parce que je le vaux bien” (“Because I’m Worth It”), which also happens to be the L’Oréal Paris brand’s iconic tagline.

So who might play the leading lady? Langmann has said Jeanne Moreau would make a good fit, although nothing’s been confirmed.

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