Talk of Nestle Interest Lifts L’Oreal Shares

Driven by intense market speculation that Nestlé could buy out L'Oréal, the French beauty giant's shares rose 2.08 percent on the Paris bourse...

PARIS — Driven by intense market speculation that Nestlé could buy out L’Oréal, the French beauty giant’s shares rose 2.08 percent on the Paris bourse Monday to 83.17 euros, or $130.90 at current exchange.

This story first appeared in the April 8, 2008 issue of WWD.  Subscribe Today.

Fueling the conjecture was the Swiss food giant’s announcement Monday that it will sell a 24.85 percent stake in its Alcon eye care business to health care company Novartis, with an option to sell its remaining 52 percent share starting in 2010. Valued at $143.18 a share, the sale gives Nestlé an initial $11 billion cash injection and a potential total of $39 billion come 2010.

As for rumors of its interest in taking over L’Oréal, in which it has a 29 percent stake, a Nestlé spokesman said, “All these things are just speculation, nothing else. In 2009, the contract we have with L’Oréal comes to an end. We have publicly stated our commitment that we will not try to take a majority stake in L’Oréal as long as Madame Bettencourt is alive. We have said that publicly, very often.”

He was referring to Liliane Bettencourt, L’Oréal’s other major shareholder, who is the 85-year-old daughter of L’Oréal’s founder, Eugene Schueller. She holds a 30 percent stake in the company. Under the terms of the shareholder agreement, Nestlé is free to sell its holding in L’Oréal starting in April 2009 and cannot take a majority share in the firm until 2012 unless Bettencourt passes away earlier

A L’Oréal spokeswoman had no comment on the market speculation regarding Nestlé.

Nestlé said its move to reduce its holding in Alcon will be used to cut debt as the Swiss company pursues its ongoing share buyback program.

“In addition, these proceeds will support opportunities for profitable growth in line with the group’s nutrition, health and wellness orientation,” the firm stated.

Analysts suggested growth through acquisitions is a prime possibility. “The fact that the Alcon sale is in two steps is suggestive,” said Chicuong Dang, equity analyst at Paris-based Richelieu Finance. “It gives Nestlé time to organize itself to make an acquisition, and the likelihood would be L’Oréal.”

The French beauty company is the world’s largest, with sales of 17.06 billion euros, or $23.39 billion at average exchange, last year.

“Nestlé is already the worldwide leader in drinks, in baby foods,” continued Dang. “There are few other big possibilities in the short term. L’Oréal would be a solution for Nestlé.”

In Dang’s view, Nestlé’s chairman and chief executive officer, Peter Brabeck-Letmathe, may be aiming to create a behemoth built on two poles — food plus health and personal care — like Unilever.

“L’Oréal could clearly be part of that strategy,” he said.

And it could be an attractive one, some industry insiders believe.

“Nestlé thinks that if it acquired L’Oréal it could increase L’Oréal’s profit margins enormously,” said another analyst, speaking on condition of anonymity.

Yet others don’t see such a deal in the offing.

“The synergy potential Nestlé has with L’Oréal — they already have today,” said Patrick Hasenboehler, equity analyst at Sarasin Equity Research, referring to Nestlé and L’Oréal’s ventures, including pharmacy brand Galderma and food supplements business Inneov.

“I don’t see any synergies from a production or a distribution point of view, because they’re very different businesses,” said another market watcher, requesting anonymity.

Meanwhile, thanks to L’Oréal’s ongoing share buyback programs, Nestlé’s stake has been increasing.

“L’Oréal is buying back shares, which automatically increases the shareholding of the Bettencourt family and Nestlé,” explained a Nestlé spokesman.