Nestlé sells part of L'Oreal
The world's largest food and beverage producer, Nestlé, is selling parts of its equity portfolio in L'Oreal, a world-renowned manufacturer and marketer of beauty products.
Shares in Nestlé and L'Oreal rose on Wednesday 8 December after the Swiss food group trimmed its stake in the French beauty giant, a deal that pleases investors on both sides while keeping ties between the two companies broadly intact.
The threat from French socialists
The world’s biggest food and drink producer has been a major shareholder in L’Oreal, the owner of brands like Elvital, Lancome and numerous famous beauty brands since 1974; when L'Oreal heir, Liliane Bettencourt, entrusted nearly half her stake to Nestlé for fear it would be nationalized if Socialists came to power.
The presence of Nestlé, which is cutting its stake to just over 20% from 23% by selling shares worth about $10 billion.
For Nestlé, L’Oreal has been an extremely successful investment. Shares in the global beauty-maker yielded a total return of 11% on an annualized basis, excluding dividends, according to analysts at Vontobel.
The shares hit a record high of 433.65 euros on Wednesday 8 December, having more than trebled in value since Nestlé first sold an 8% holding in 2014.The stake Nestlé is selling will be bought back by L’Oreal, increasing the Bettencourt Meyers family holding to 34.7% from around 33%.
“Good business for both. It reduces Nestlé's exposure to L'Oreal, which at about 16% of its market cap pre-transaction was becoming troublingly high. It makes L'Oreal's balance sheet more efficient, while keeping ownership ‘in the family’,” argues broker Jefferies.
Intense discussions for years
Nestlé's holding in L'Oreal has been the subject of intense discussions over the years as Chief Executive Mark Schneider rotated the company towards nutrition and wellness, and activist investors in 2017 urged the Schneider to sell out.
Nestlé was keen to maintain a holding above 20%, allowing it to consolidate the investment on accounts. Sources near to Nestlé said it is unlikely to sell more of its stake for now.
“When your financial investment reaches all-time highs, it is not surprising that you monetise some of it, especially when there is no strategic partnership and when it can continue to fuel your equity story of strong cash returns,” analysts at Bernstein said.
A spokesperson for Nestlé said the stake sale left the company in a "best of both worlds" situation.
“On the one hand, we monetise around 9.3 billion Swiss francs (8.9 billion euros). On the other hand, it keeps us involved with a remarkably successful company.”
This writer does not think Nestlé will let the 8.9 euros lie dormant for long. Nestlé's aggressive acquisition history is well known. It will not be many months before Nestlé announces another major acquisition. Maybe Norwegian Orkla? The company has long been in the group's spotlight.
Sources: Reuters, Nestlé, L’Oreal