The Swiss group’s relationship with L’Oréal was formed at the behest of Liliane Bettencourt, L’Oréal’s biggest shareholder and the world’s richest woman, in 1974 due to fears that France’s Socialists would nationalise the company her father founded in 1909.
The stake has proved financially lucrative for Nestlé, the world’s largest food group by sales, yielding a return of more than 15 per cent a year on average. The decision to sell, announced jointly by the two companies on Tuesday, will see Nestle’s investment fall from 29.4 per cent to 23.3 per cent.
Peter Brabeck, Nestle’s chairman, stressed that his company was not pulling away from the accord, which has bound Nestle’s fortunes with those of 91-year-old Ms Bettencourt.
“It’s not a sign of disengagement or a strategic change and we’re integral to L’Oréal’s future,” he said at a press conference. “We are in here for the long haul.”
But speculation over Nestle’s long-term interests has been mounting ever since Mr Brabeck made it clear last year that he would not renew a clause in an agreement with the Bettencourts that forbids each of the parties from selling their cross-holdings without first offering them to the other. That clause expires in April.
Jean-Paul Agon, L’Oréal’s chairman and chief executive, told the FT that the deal was “great . . . it’s hard to find a deal that is good for everyone – this is one of them”.
Under the terms of the transaction, L’Oréal will buy 8 per cent of its shares held by Nestlé, in return ceding its 50 per cent stake in Galderma, a jointly-owned skin pharmaceuticals company, and €3.4bn in cash. Nestlé has also agreed to reduce the number its representatives on the board of the French company from three to two.
That prices the Galderma pharmaceutical joint venture at what RBC described as a “punchy” 26.5 times last year’s earnings before interest and tax. Nestlé will rename the entity Nestlé Skin Health.
Lazard advised L’Oréal on the deal while Rothschild acted for Nestlé. L’Oréal also turned to Michael Zaoui, the veteran rainmaker and former head of European M&A, at Morgan Stanley for advice on the deal, according to people close to the situation
L’Oréal said that it would cancel the repurchased shares following the transaction. That would increase recurring earnings per share 5 per cent on a full year basis.
The reduced share base also means that the Bettencourt stake increases from 30.6 per cent to 33.31 per cent – just under the 33.33 per cent ceiling over which French law obliges the shareholder to make a full offer.
Mrs Bettencourt’s shareholding has been under the guardianship of family members since 2011, when a court concluded that she was unfit to look after it herself.
Not everyone was happy, though. Pierre-Henry Leroy, who heads the Proxinvest, which provides governance advice to big and small shareholders, said he was yet convinced that L’Oréal was getting the right price for its share of Galderma. “Until we have seen the figures on the Galderma shares and at which price those shares are sold, it will be difficult to have a positive vision of the transaction,” he said.
L’Oréal shares closed 3.3 per cent down at euros 124.80 on Tuesday after climbing sharply on Monday on building expectation.
Meanwhile, analysts pointed out that the announcement still left Nestlé open to further disposals later on – even though the Swiss company suggested that it would hold on to its investment.
In a research note, Toby McCullagh, an analyst at Citi Research, said that the deal only partially addressed the months of speculation. “There remains the big question of when Nestlé expects to dispose of its remaining holding,” he wrote.
Jean-Paul Agon, chairman and chief executive of L’Oréal, said the size of the deal with Nestlé was partly determined by ensuring the threshold of 33.33 per cent was not exceeded.
Mr Brabeck said Nestlé would “continue to act in concert with the Bettencourt Meyers family and the existing agreements, adapted to the new situation, will remain in place”.
Mr Agon said L’Oréal would also benefit from “a significant and reinforced presence from the founding Bettencourt Meyers family, who will continue to fully support the company as it always did in the past”.
He acknowledged that there was potential for some L’Oréal products to be in competition with those made by Nestlé Skin Health, but said the two companies’ strategic directions would “be parallel and not converge”.
“We have an excellent relationship and this type of problem will not arise,” he said at the press conference.
L’Oréal remains French drugmaker Sanofi’s core shareholder and is “very happy” with that situation, Mr Agon said. L’Oréal said the deal with Nestlé would not require the disposal of its 8.9 per cent stake in Sanofi, whose shares fell 1.9 per cent.
RBC Capital Markets wrote before the deal was announced that “for Nestlé, this would be the most demonstrable illustration of its commitment to capital discipline and shareholder value that we can imagine”.
“For L’Oréal we believe such a transaction would make sense, but this is already largely captured in L’Oréal’s share price,” he added.
Additional reporting by John Aglionby and Anne-Sylvaine Chassany in London
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