Eyes on L'Oréal-Nestlé Ties -- WSJ

By Matthew Dalton and Brian Blackstone 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the U.S. print edition of The Wall Street Journal (September 23, 2017).

PARIS -- The death of Liliane Bettencourt has placed a question mark over the decadeslong ties between L'Oréal SA and Nestlé SA, two of the world's largest consumer-goods companies.

Shares in L'Oréal jumped Friday as investors began speculating on the possibility either side might reconsider Nestlé's large stake in L'Oréal. Analysts and a person close to the Bettencourt family, however, are tamping down expectations of a shake-up, citing a thicket of financial hurdles as well as the companies' comfort with the status quo.

Nestlé, the Swiss consumer-goods giant, and L'Oréal, the world's biggest cosmetics company, have been intertwined since 1974, when Ms. Bettencourt, heiress to the L'Oréal cosmetics fortune, swapped a large stake in L'Oréal for shares in Nestlé to fend off a feared nationalization by the French state.

That agreement between Nestlé and Ms. Bettencourt, who died Thursday in Paris at the age of 94, allows either party to increase its stake in L'Oréal six months after her death.

Nestlé and L'Oréal have been moving to unwind their relationship in recent years. In 2014, Nestlé agreed to sell 48.5 million L'Oréal shares back to L'Oréal for assets and cash, cutting its stake from 29.4% to 23.29%. Ms. Bettencourt's stake in L'Oréal rose from 30.6% to 33.31%, while Nestlé's presence on L'Oréal's board shrank from three seats to two.

Following Ms. Bettencourt's death, Nestlé expressed its condolences and said now is "not the right time" for additional comment. But executives have previously said they are in no rush to trim the L'Oréal stake further.

"This asset has been delivering stellar financial returns to us in recent years, and we also consider it a strategic asset. Hence anything we would ever want to do on that would need to be pondered very carefully," Nestlé Chief Executive Mark Schneider told a news conference in February

Some analysts have also questioned whether Ms. Bettencourt's death could prompt her heirs either to get rid of their shares in L'Oréal or to increase their stake in the company. But a person close to the family and analysts say neither outcome is likely.

Françoise Bettencourt Meyers, Ms. Bettencourt's only child, orchestrated the 2014 deal to cement her family's control over L'Oréal. Neither she nor her sons want to separate from the company, a person close to the family said Friday.

"It's the story of their life, their family," the person said. "They are very attached to the company."

The family faces a significant obstacle to increasing its stake: Under French law, any shareholder that wants to own more than a third of a company must make an offer to buy all of the company. That would stretch the pockets of even one of the world's richest families.

"Launching a mandatory offer on L'Oréal would require close to EUR60 billion, which is a significant amount," said Marion Boucheron, an analyst at Raymond James in Paris.

The relationship between the two companies extends beyond shareholding. Nestlé's stake in L'Oréal gives it a valuable asset in neighboring France while providing L'Oréal with a stable long-term investor.

Nestlé has two representatives on L'Oréal's board of directors: Nestlé Chairman Paul Bulcke and General Manager for Germany Béatrice Guillaume-Grabisch.

But Nestlé has come under investor pressure to sell off its stake in L'Oréal to strengthen its core businesses that includes coffee, water pet care, infant formula and health science. The pressure comes as Nestlé has struggled to meet a long-term revenue growth target of 5% to 6% that it has missed four straight years and ended up ditching altogether early this year.

In June, billionaire activist investor Daniel Loeb's Third Point LLC said it had taken a $3.5 billion 1.25% stake in Nestlé and pressed for changes, including the sale of noncore assets such as Nestlé's stake in L'Oréal.

Days later, Nestlé announced a 20 billion Swiss franc ($20.6 billion) share buyback program and said it would orient its capital spending toward high-growth parts of its business, including pet care, infant nutrition, coffee and bottled water.

Selling some of its L'Oréal stake to the Bettencourt family would give Nestlé the financial means to increase the amount of the buyback, analysts say.

"While [Nestlé's] passive investment in [L'Oréal] looks like an anachronism to us, they might perceive it as a store of value, capable of being liquidated years hence when the right opportunity presents itself," said Martin Deboo, an analyst at Jefferies, in a research note. "For [L'Oréal 's] part, they will value the stability and security afforded by tightly held ownership."

Write to Matthew Dalton at [e-mail] and Brian Blackstone at [e-mail]

(END) Dow Jones Newswires

September 23, 2017 02:47 ET (06:47 GMT)

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