L’oréal no closer to answering nestlé share stake questions 14-02-12


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L’oréal no closer to answering nestlé share stake questions 14-02-12

  1. 1. L’Oréal no closer to answering Nestlé share stake questions By Adam Thomson in Paris  Connected family: Liliane Bettencourt, center, leaves the funeral of Claude Pompidou, the ex-French president’s widow, in 2007 with husband André Bettencourt, left, and daughter Françoise L’Oréal sought on Tuesday to answer the most important question that has played on the minds of investors big and small for the past year: what was to become of Nestlé’s 29.4 per cent stake in the French cosmetics producer? The speculation surrounding the Swiss food group’s plans had turned into a whirlwind in recent days – fuelled by the fact that from April Nestlé would be free to sell its stake to a third party without first offering it to L’Oréal. But when the answer finally came – Nestlé said that it would sell 8 per cent of L’Oréal’s share capital back to the French company – it left many investors with even more doubts than before. L’Oréal’s share price, which had climbed in the build-up, promptly fell and ended the day 3.3 per cent lower. Jean-Paul Agon, the French cosmetic group’s chairman and chief executive officer, told the Financial Times that the “strategic transaction”, as the two companies had called it, was the final word. “It’s done, it’s over,” he said. “This strategic operation is great for all parties.” But others are not so sure. In spite of comments to the contrary by Peter Brabeck, Nestlé’s chairman, analysts point out that there is nothing to stop the Swiss food group from selling more of its L’Oréal holding to a third party come April. Colette Neuville, who heads France’s Minority Shareholders’ Defence Association (Adam), said: “Nestlé says it will remain an investor, but until when?” Other doubts hinge on what L’Oréal intends to do with all the cash it generates. Tuesday’s deal will leave the cosmetics group, which last year had revenues of €23bn and operating profit of €3.9bn, with only about €700m in debt, and the prospect of being cash positive again within a year. “What are they going to do with that money?” asked Andrew Wood at Bernstein Research. “There does not seem to be much out there for L’Oréal to buy.”
  2. 2. Mr Wood pointed out that if the maker of Lancôme and Garnier uses that cash to buy its own shares, Nestlé’s diminished holding after Tuesday’s deal could eventually even start to rise again. “It would be like a yo-yo,” he says. Such a scenario would also likely cause headaches for France’s Bettencourt family, L’Oréal’s principal shareholder. The repurchase and cancellation of 8 per cent of L’Oréal’s share capital from Nestlé places the Bettencourt family’s stake at 33.31 per cent – a whisker under the 33.33 per cent ceiling above which French law obliges shareholders to make a bid for the whole company. Whether it could ask France’s stock market authorities – and gain acceptance – for a special exception remains unclear. But for all its limitations, the deal does have some clear advantages for L’Oréal. In a statement, the company said that the deal would increase recurring earnings per share by 5 per cent on a full-year basis. Moreover, Nestlé has remained a responsible and trustworthy partner to L’Oréal for the best part of half a century. Tuesday’s agreement in advance of the April deadline will doubtless be seen as further evidence of the close bonds between the two companies – and the Bettencourt family. Nestlé’s Mr Brabeck told investors: “I do not see this as a first step of leaving L’Oréal … not at all.” As if for good measure, he added: “We are in here for the long haul.” Even so, Mr Agon of L’Oréal made clear in August that his company had the financial firepower to buy Nestlé’s entire stake. At the time, he said that doing so would also be good for L’Oréal’s shareholders – even if analysts have questioned whether such a move would have been legally and technically possible. The deal falls far short of that apparent desire. It also leaves plenty of questions unanswered. As Mr Wood of Bernstein puts it: “L’Oréal probably wanted clarity and this deal does not really provide that.” Timeline: tracking the business of beauty 1909: The company is founded by chemist Eugène Schueller to manufacture hair dyes, which quickly prove popular with Parisian hairdressers. 1954: L’Oréal launches its products in the US. 1974: Liliane Bettencourt, Schueller’s daughter, invites Swiss food group Nestlé to buy a stake in L’Oréal, amid fears of possible nationalisation by the French government. 1989: L’Oréal acquires US brand Helena Rubinstein, and signs licensing deal with Giorgio Armani. 2004: Nestlé signs a pact with the Bettencourt family giving each side right of first refusal in case either seeks to sell their respective stakes. Nestlé agrees it will not raise its stake in L’Oréal until at least six months after Liliane Bettencourt dies. ©AP January 2012: Liliane Bettencourt, right, loses an appeal to retain control of her €15bn fortune after a French court upholds a decision that she be placed under the protection of her family on medical grounds. August 2013: L’Oréal chief executive Jean-Paul Agon says the company has the resources to buy back Nestlé’s 29 per cent stake. February 2014: Nestlé sells an 8 per cent stake in L’Oréal back to the cosmetics maker for an implied equity value of €6bn, but insists it is not breaking its ties with the company.