(Repeats Tuesday story with no changes)
* Restrictions on selling L’Oreal stake end in April 2014
* Nestle wants to focus on nutrition, health and wellness
* Analysts expect it to sell L’Oreal stake in tranches
* A stake sale would end a relationship going back to 1974
By Astrid Wendlandt and Silke Koltrowitz
PARIS/ZURICH, Sept 10 (Reuters) – Marriage, divorce or
continued cohabitation? Nestle, the world’s biggest
food company, is under pressure to make its intentions clear
towards L’Oreal, its partner of 40 years, when the
ties that bind them loosen next year.
The decision is the preserve of long-serving Chairman Peter
Brabeck, who is trying to reposition Nestle away from reliance
on processed foods toward higher-margin products with a
“nutrition, health and wellness” profile.
One can argue that L’Oreal’s cosmetics and shampoos are
compatible with that mission, but eight of the nine analysts
that spoke to Reuters thought Nestle was likely to sell down its
holdings in L’Oreal, once restrictions on doing so end in April.
They think the company can sell the stake, worth 23 billion
euros ($30 billion), in tranches and use the cash on something
central to its own business or return the cash to shareholders.
“If investors want to invest in L’Oreal, they can invest
directly in L’Oreal,” said a consumer industry banker who spoke
on condition of anonymity. “They don’t need Nestle for that.”
The Swiss food group has been a major shareholder in the
French cosmetics firm since 1974, when L’Oreal heiress Liliane
Bettencourt, now the world’s richest woman, entrusted nearly
half her stake to Nestle for fear it would be nationalised if
Socialists came to power.
It turned out to be a great investment for Nestle, as
L’Oreal shares have yielded a total return of 15 percent on an
annualised basis since then. Nestle’s own shares yielded 11.6
percent. http://r.reuters.com/kak82v
Nestle owns 29.5 percent and Bettencourt owns 30.5 percent
of L’Oreal, the firm her father founded as a maker of hair dye.
The heiress is now 90 and under the guardianship of family
members since a court fight ended with a 2011 ruling that she
was incapable of looking after her fortune.
According to a shareholder pact agreed in 2004, Nestle
cannot increase its stake until six months after Bettencourt
dies. Bettencourt and Nestle also promised not to sell their
stake without first offering it to the other until April 29,
2014, 40 years after the initial deal was signed.
The Bettencourts have said they had no plans to sell.
Last month, Brabeck said Nestle did not plan to renew its
right of first refusal with the Bettencourts, arguing that the
lock-up depresses the value of the stake.
He said Nestle wanted to keep options open, which include
maintaining the status quo.
That prompted speculation that the maker of Nescafe coffee,
KitKat chocolate bars and Purina dog food might be preparing to
part company from the world’s biggest beauty firm, which makes
Lancome skin cream, Garnier shampoo and Maybelline mascara.
“The comment makes us think that Nestle has no intentions to
increase its stake in L’Oreal, and we now believe that the
scenario of Nestle selling its stake in or after April 2014 is
more probable,” Liberum Capital analysts said in a note.
L’Oreal was quick to say it would be able to buy back the
stake from Nestle, thanks to a net cash position of 572 million
euros that frees it to raise debt, and a 9 percent stake in
drugmaker Sanofi worth 9 billion euros.
The speculation has contributed to a nearly 2 percent
decline over the last eight days in shares of L’Oreal, the third
most valuable company in France, while slightly pressuring those
of Sanofi, the second biggest.
“It would be very surprising if Nestle remained nebulous
about their plans,” one fund manager said. “It is their
responsibility to state out clearly what they plan to do.”
Nestle might prefer to keep the market guessing, but L’Oreal
will want a decision soon, because keeping cash in place to buy
the stake curbs its firepower for other big deals.
Last month, L’Oreal offered to buy Chinese facial mask maker
Magic Holding International for HK$6.54 billion ($840
million).
Formerly best-in-class Nestle, which is grappling with
disappointing results for the first time in years, will be
grilled on the issue at an investor seminar at its Vevey
headquarters on Sept. 30 and Oct. 1.
Were Nestle to decide to sell out, L’Oreal could buy back
its shares and cancel them, a move that analysts gauge would
lift earnings per share for remaining shareholders by around 20
percent.
Depending on how a deal were structured, if Nestle returns
proceeds to shareholders from selling its L’Oreal stake it could
potentially increase its own earnings per share by more than 10
percent, and lift its underperforming shares.
In the year to date, Nestle shares have risen 3.4 percent,
while L’Oreal shares are up 20 percent, and the Stoxx European
personal and household goods index is up 11.6 percent.
Nestle declined to comment beyond pointing to a statement on
its website that says the board is addressing the future of the
stake “with great attention in the framework of the group’s
global nutrition, health and wellness strategy”.
Former chairman and CEO Helmut Maucher, who is still
honorary chairman, stated in 1992 that Nestle eventually wanted
to buy L’Oreal, souring relations with Liliane Bettencourt that
were only patched up with the shareholder pact in 2004.
Although a merger to create a giant food and cosmetics
conglomerate could be seen to fit Brabeck’s “health and
wellness” strategy, no Nestle executive has expressed any
interest in a takeover in recent years, and the companies share
little operationally apart from two dermatology joint ventures.
Any attempt would likely face resistance from the French
government, hostile to foreign takeover attempts in the past.
Nestle, which started as Europe’s first condensed milk
factory 147 years ago before growing into a global food and
beverages giant, selling everything from baby formula to bottled
water, has been independently pursuing its health ambitions by
developing foods that help prevent chronic diseases.
Brabeck, 68, will be keen to cement his legacy by giving
more clarity on Nestle’s strategy before he retires in 2016.
“He will want to have defined a clear line for his
‘nutrition, health and wellness’ concept, and the future of the
L’Oreal stake ultimately depends on that,” said Friedhelm
Schwarz, author of books on Brabeck and Nestle.
A member of the L’Oreal board since 1997, Brabeck stepped
down as CEO in 2008 after a decade in the job but stayed on as
chairman with a remit to review Nestle’s stakes in L’Oreal and
eye care firm Alcon, which the firm sold later that year.
Nestle has no urgent need to sell its L’Oreal stake, which
contributes roughly 10 percent of its earnings per share. It
does not need the cash; it had 3.9 billion Swiss francs ($4.1
billion) as of end-June and generates earnings before interest,
depreciation and amortisation of around 18 billion francs.
Nestle is also still integrating its $11.9 billion
acquisition of Pfizer’s baby food business, which it
funded with the Alcon proceeds.
JP Morgan Cazenove says one scenario could be that L’Oreal
buys the Nestle stake in three tranches over four years, which
it estimates would lift L’Oreal’s 2018 earnings by 23 percent.
It would be difficult for L’Oreal to buy more than 10
percent a year as companies are limited in the amount of share
capital they can cancel every two years.
Unlike Nestle, L’Oreal is outperforming its peers, having
successfully revamped and repositioned many of its big brands
such as Vichy creams and Garnier shampoo, with sales growth of
5-6 percent in a market growing at 3.5-4.0 percent.
L’Oreal declined to comment for this report.
($1 = 0.7538 euros)
($1 = 0.9348 Swiss francs)
(Additional reporting by Emma Thomasson in Berlin, Martinne
Geller and Francesco Canepa in London and Pascale Denis and
Alexandre Boksenbaum-Granier in Paris; Editing by Peter Graff
and Will Waterman)
