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L’Oreal Taking Direct Control Over Cosmair

PARIS -- Lindsay Owen-Jones, chairman and chief executive officer of L'Oreal, said Thursday that the group would take over its U.S. licensee, Cosmair Inc., thus ending an awkward arrangement that has endured since Cosmair was founded back in the...

PARIS — Lindsay Owen-Jones, chairman and chief executive officer of L’Oreal, said Thursday that the group would take over its U.S. licensee, Cosmair Inc., thus ending an awkward arrangement that has endured since Cosmair was founded back in the Fifties.

L’Oreal’s takeover of Cosmair, which had 1993 sales of more than $1.3 billion, is part of a plan to put the Paris-based group in control of all its major markets throughout the world. In addition to the U.S. company, the move includes Cosmair Canada, Lorsa-Fagel of Switzerland and Procasa of Spain.

The Cosmair brands include some of the best-known names in the beauty business: Lancome, and the Ralph Lauren, Giorgio Armani and Paloma Picasso fragrances at the prestige level, and Plenitude treatment products and Gloria Vanderbilt in the mass market.

No value was given for the complicated transaction, which will involve both cash and an exchange of L’Oreal stock among L’Oreal and its main shareholders. L’Oreal is controlled by the Gesparal holding company, of which the Bettencourt family owns 51 percent and Nestle SA 49 percent.

That’s what has made the long-standing arrangement awkward much of the time. Although Cosmair was the biggest piece of L’Oreal’s business, it wasn’t directly owned by L’Oreal. If L’Oreal wanted to invest a lot of money in a Plenitudes launch, for example, it would first have to check with Nestle and the Bettencourts.

During a meeting at L’Oreal’s headquarters outside Paris, Owen-Jones said the deal had been carefully crafted to preserve the balance of ownership between the Bettencourts and Nestle.

Owen-Jones told security analysts that the new arrangement, set to go into effect by the end of this year, would give L’Oreal a surer hand in running its businesses around the world.

Until now, L’Oreal has had management control of Cosmair, for example, but could not take major actions without consulting Cosmair’s majority owners — Nestle SA, which has 76 percent of the American company, and the Bettencourt family, which owned most of the remainder. L’Oreal had only 3.7 percent.

“I do not expect this to change our ambitions for Cosmair,” Owen-Jones said, emphasizing that the move did not indicate any weakness in the American operation.

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“We want to build on our success,” he continued. “It will simplify our operations because we will no longer have to look for a balance with the shareholders every time we want to make a decision. It’s hard to lead a subsidiary we do not own.”

Owen-Jones should know. He ran Cosmair from 1981 to 1984, the period when the company began explosively to become a major player in the American market. Although the L’Oreal board approved the deal in principle on Thursday, company officials said they were still discussing the terms with Nestle and the Bettencourt family.

It will be submitted for shareholders’ approval at the annual meeting, which has not been scheduled but is expected to take place before the end of June.

Here’s how the deal will work: The Bettencourts will transfer their minority holding in Cosmair USA and Cosmair Canada to the Gesparal holding company, and Nestle will transfer part of its Cosmair stake to Gesparal. The holding company, in turn, will transfer these shares to L’Oreal in exchange for L’Oreal stock.

Nestle will sell the remainder of its holding in both Cosmairs, plus its holding in Lorsa-Fagel and Procasa to L’Oreal for cash. In the end, L’Oreal will own virtually all of the American, Canadian and Swiss operations and 49 percent of the Spanish company, which will continue to be controlled by other shareholders, who declined to sell.

The two Cosmairs market a broad range of L’Oreal’s product assortment in their domestic markets, but the Swiss and Spanish companies activities’ were limited to hair products and mass market cosmetics. Last year Cosmair USA had sales of $1.3 billion; Cosmair Canada had a volume of $146 million; Lorsa sales were $89.6 million, and Procasa’s were $20.6 million.

While security analysts praised the logic of the move, they had mixed opinions on the immediate effect on the value of the L’Oreal stock. In general, some expected the share price, which closed down 3 percent to $205 (1,187 francs) on Thursday, to fall even further when the market opened this morning because of uncertainty over the cost of the deal.

Others, however, argued that the move would improve L’Oreal’s profitability in the long run by streamlining management of Cosmair and the other subsidiaries.

Analysts said the traditional method of calculating an acquisition price — multiplying profits by a factor ranging from 11 to 14 — might not be relevant in this case. They noted that Cosmair, in practice, is bound to L’Oreal because its sole activity is to distribute L’Oreal products and therefore could be expected to be valued for less than an independent company.

Earlier in the meeting, L’Oreal executives announced 1993 net profits before capital gains and losses and after minority interests increased 12.5 percent to $445 million (2.58 billion francs). Consolidated sales, which do not include licensees, were up 6.9 percent to $6.9 billion (40.2 billion francs).