L'Oreal, the world's largest cosmetics company, agreed to buy back 8 percent of its stock for six billion euros from Nestle, which has been an investor in the company for 40 years. The deal will increase L'Oreal's earnings a share and sharpen Nestle's focus on nutrition and health products. Photo: Bloomberg

Matthew Boyle and Andrew Roberts Amsterdam and Paris

L’Oréal, the world’s largest cosmetics maker, has agreed to buy back 8 percent of its stock from Nestlé for e6 billion (R90.8bn), the first sale of shares by the Swiss company after four decades of ownership.

L’Oréal would pay e3.4bn 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 yesterday.

The share buy-back will boost L’Oréal’s earnings a share, while sharpening Nestlé’s focus on nutrition and health goods.

Nestlé considered its remaining stake to be “strategic” and would be held for the long term, chairman Peter Brabeck-Letmathe said yesterday in Paris. The transaction did not represent a disengagement from the cosmetics company, he said, though some analysts suggested that the sale might be just the beginning.

RBC Capital Markets analyst James Edwardes Jones said: “The eventual disposal of Nestlé’s entire holding in L’Oréal is the logical conclusion. That said, we wonder if there will be a slight feeling of anticlimax on the part of investors given that it looks as if the disposal will be done piecemeal and there is no clarity on the end game.”

Nestlé will own 23.3 percent of L’Oréal following the completion of the transaction, down from 29.4 percent.

L’Oréal is paying e124.48 a share and all the stock purchased will be cancelled. 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.

Nestlé’s number of seats on the L’Oréal board will drop to two from three.

“This is as close to maintaining the status quo as was politically possible given L’Oréal’s interest in taking the stake,” said Jon Cox, an analyst at Kepler Cheuvreux in Zurich.

Yesterday’s transaction assigns an equity value of e2.6bn to L’Oréal’s half share in Galderma, a Lausanne-based joint venture between the companies that was created in 1981 and had sales of Sf2bn (R24.7bn) last year.

Galderma makes treatments for acne and psoriasis. Nestlé said the fully owned company would become part of a new division known as Nestlé Skin Health, which would sell products ranging from drugs to medicated soaps, sunscreens and medical devices for skin, hair and nails.

The question of what to do with the L’Oréal holding has taxed Nestlé since 2000, when Brabeck-Letmathe was chief executive and proposed a stronger push into cosmetics. The board deemed that too ambitious and Brabeck-Letmathe decided instead to focus on nutrition and health, according to the company’s official history. In addition to his Nestlé role, Brabeck-Letmathe is a vice-chairman of L’Oréal.

The impact of the deal on Nestlé’s earnings would probably be minor, Bank Vontobel analyst Jean-Philippe Bertschy said. While it would mean less profit from the L’Oréal stake, there would be accretion from the Galderma holding, Bertschy wrote in a note.

Nestlé could also use proceeds to buy back 4 percent of its own stock, said Patrick Hasenboehler, an analyst at J Safra Sarasin.

L’Oréal said the transaction would boost earnings a share by a recurring 5 percent on an annual basis. The buy-back would be financed exclusively with cash and issuance of commercial paper and would not require the sale of its stake in French pharmaceuticals maker Sanofi, the company said.

“The agreement allows us to continue the big adventure of L’Oréal in an independent manner,” chief executive Jean-Paul Agon said at a press conference.

L’Oréal said late on Monday that it was confident of outperforming the global cosmetics market this year after reporting fourth-quarter organic sales growth that topped analysts’ estimates. Nestlé reports earnings tomorrow.

The transaction is expected to close before the end of the first half. – Bloomberg