(Updates with L’Oreal, Nestle comments from presentation.)
Feb. 11 (Bloomberg) -- L’Oreal SA, the world’s largest cosmetics maker, agreed to buy back 8 percent of its stock from Nestle SA for 6 billion euros ($8.2 billion), the first sale of shares by the Swiss company after four decades of ownership.
L’Oreal will pay 3.4 billion euros in cash for 27.3 million shares and exchange its half of the Galderma skincare joint venture for a further 21.2 million shares, the Paris-based maker of Maybelline mascara said in a statement. Nestle intends to use the cash proceeds to start a share buyback program, it said.
The purchase will boost L’Oreal’s per-share earnings, while sharpening Nestle’s focus on nutrition and health products. The transaction doesn’t mean Nestle is disengaging from L’Oreal, Chairman Peter Brabeck-Letmathe said today in Paris, calling the foodmaker’s stake “strategic” and “long term.”
The transaction seemed initially to be “the first stage of a process that would ultimately see Nestle’s stake reduced to zero,” said James Edwardes Jones, an analyst at RBC Capital Markets in London. However, the rhetoric used by the companies means “this transaction feels like a one-off and leaves us feeling somewhat underwhelmed.”
L’Oreal declined 3.2 percent to 124.85 euros at 3:09 p.m., following Brabeck’s comments, after initially rising as much as 4.6 percent. The stock advanced 4.5 percent yesterday after Bloomberg News reported that Nestle was exploring ways to reduce its stake.
Nestle slipped 1.3 percent to 66.70 Swiss francs in Zurich. It will own 23.3 percent of L’Oreal following the completion of the transaction, down from 29.4 percent.
In addition to buying back shares, the Vevey, Switzerland- based company is examining acquisitions and may look at areas including skincare, according to a person familiar with the situation. A Nestle spokesman declined to comment on whether the company had imminent plans to make purchases.
L’Oreal is paying 124.48 euros a share and all the stock purchased will be canceled. The stake held by the Bettencourt family, the billionaire heirs of the cosmetics maker’s founder, will increase to 33.3 percent from 30.6 percent. Liliane Bettencourt is Europe’s wealthiest woman, according to the Bloomberg Billionaires index. Nestle’s number of seats on the L’Oreal board will drop to two from three.
The ownership ceiling provisions of Nestle’s shareholder pact with the Bettencourt-Meyers family will continue to apply to the new levels of ownership in the same conditions, they said in a joint statement. Both parties will continue to act in concert with respect to L’Oreal for the remaining duration of the agreement. The Bettencourt-Meyers family reiterated its commitment and long-term support of L’Oreal, it said.
“This is as close to maintaining the status quo as was politically possible given L’Oreal’s interest in taking the stake,” said Jon Cox, an analyst at Kepler Cheuvreux in Zurich.
L’Oreal doesn’t plan in the short term to apply for an exemption from French market authority rules regarding ownership, L’Oreal Chief Executive Jean-Paul Agon said. The CEO said the amount of shares L’Oreal agreed to buy from Nestle is the level that affords the maximum accretion for the Bettencourt family below the one-third threshold that typically triggers a mandatory share offer.
“This is the first round here but it doesn’t necessarily require or lead to a second round as in politics,” Agon said. “This has been a major transaction so let’s catch our breath. We’ll see what the future brings.”
Today’s transaction assigns an equity value of 2.6 billion euros to L’Oreal’s share in Galderma, a Lausanne-based joint venture between the companies that was created in 1981 and had sales of 2 billion francs ($2.2 billion) last year.
Galderma makes treatments for acne and psoriasis. Nestle said the fully owned company will become part of a new division known as Nestle Skin Health SA, which will sell products ranging from drugs to medicated soaps, sunscreens and medical devices for skin, hair and nails.
Exiting Galderma doesn’t change the potential of active cosmetics, L’Oreal’s fastest-growing business unit, Agon said.
The question of what to do with the L’Oreal holding has taxed Nestle since 2000, when Brabeck was CEO and proposed a stronger push into cosmetics. The board deemed that too ambitious and Brabeck decided instead to focus on nutrition and health, according to the company’s official history. In addition to his Nestle role, Brabeck is a L’Oreal vice chairman.
The impact of today’s transaction on Nestle’s earnings will probably be minor, according to Jean-Philippe Bertschy, an analyst at Bank Vontobel. While it will mean less profit from the L’Oreal stake, there will be accretion from the Galderma holding, Bertschy wrote in a note. Nestle could use proceeds to buy back 4 percent of its own stock, said Patrick Hasenboehler, an analyst at J. Safra Sarasin.
L’Oreal said the transaction will boost earnings per share by a recurring 5 percent on an annual basis. The buyback will be financed exclusively with cash and issuance of commercial paper and won’t require the sale of its stake in French pharmaceuticals maker Sanofi, the cosmetics company said. Sanofi shares fell as much as 2 percent after today’s announcement and traded about 0.6 percent lower at 71.58 euros.
As a major shareholder in Sanofi, the company is “very happy” at the moment, Agon said.
L’Oreal said late yesterday that it’s confident of outperforming the global cosmetics market this year after reporting fourth-quarter organic sales growth that topped analysts’ estimates. Nestle reports earnings on Feb. 13.
The transaction is expected to close before the end of the first half. Nestle was advised by Rothschild, Brabeck said. Lazard Ltd. and BNP Paribas advised L’Oreal, Agon said.
--Editors: Celeste Perri, Thomas Mulier