L’Oreal could see structural shake-up in wake of Bettencourt death

Opportunity for Nestlé to exit its 23% holding

Could L’Oreal be facing into an ownership change?

Could L’Oreal be facing into an ownership change?

 

The death of heiress Liliane Bettencourt should force L’Oreal and its major shareholders to agree on the best ownership structure for the French cosmetics group. This historical juncture provides Nestlé with an opportunity for a graceful exit from its 23 percent holding.

An agreement between the Bettencourt family, which owns 33 per cent, and Nestle not to increase their stake in L’Oreal expires in six months. In theory, that opens the way for Nestlé to buy all of L’Oreal. But a this would be a huge and risky deal.

Transaction

Strategically, a transaction would bolster Nestlé’s skincare assets but do nothing for its primary business of food and nutrition. Buying the remaining 77 percent would cost a chunky €100 billion ($120 billion) after adding a takeover premium – and that’s assuming the Bettencourts would sell. Worse, there’s a risk that Nestlé would be buying just as the cosmetics boom is at its peak.

It’s far better for Nestlé to sell. The group has been free to offload its stake to a third party since 2014, so Bettencourt’s passing changes nothing on this front technically.

But there is now a neutral pretext for Nestlé to review the L’Oreal holding at a time when Dan Loeb’s Third Point, which has amassed a $3.5 billion stake in the Swiss group, is pushing for CEO Ulf Mark Schneider to divest it. So far, Mr Schneider has played his cards close to his chest.

What’s more, with the Bettencourts soon free to raise their stake, he has more potential buyers. There are essentially three: L’Oreal, the Bettencourts and the market.

Constraints

The stake is currently worth about €24 billion. Analysts at Raymond James say L’Oreal could buy about €10 billion worth before hitting regulatory constraints. The French group could easily afford it, having no debt and a 9 per cent stake in Sanofi to play with if it didn’t want to gear up.

Such a move would boost the cosmetics group’s earnings per share, as Bloomberg Intelligence observes. This prospect, coupled with possible bid speculation, pushed L’Oreal shares up 3.5 percent on Friday.

The remainder of the Nestlé stake could be split between a stock market placing and, possibly, the Bettencourts if they were minded to increase their holding.

Perhaps the biggest issue is what Nestlé does with the money. Even with a recently announced $21 billion buyback, net debt to Ebitda will be only 1.5 times in 2020 – and that’s before any potential disposals.

Mr Schneider could use the proceeds to be more aggressive in doing MandA to address Nestlé’s growth challenges – or fund a more generous cash return to shareholders. It’s a nicer problem to have than constantly justifying the L’Oreal stake.

- Bloomberg