Commercial awareness: think like a professional about... L'Oréal

Our banker, lawyer, consultant and accountant consider Nestlé's sale of part of its stake in the French beauty conglomerate

Nestlé has announced that it will sell part of its stake in L'Oréal back to the family that controls the French beauty conglomerate.

The Bettancourt family will buy 21.2 million L'Oréal shares currently held by Nestlé, representing around 8 per cent of the current shareholdings, which will then be cancelled. It will pay Nestlé for these by giving up its 50 per cent stake in Galderma, a skin pharmaceuticals joint venture between Nestlé and L'Oréal, and handing over €3.4 billion (£2.8 billion) in cash, together representing a total value of €6 billion.

As a result of the deal, Nestlé's stake in L'Oréal will fall from 29.4 per cent to 23.3 per cent, while the Bettancourts' will rise from 30.6 per cent to 33.31 per cent.

Nestlé has owned nearly a third of L'Oréal since 1974 when Liliane Bettencourt, the daughter of L'Oréal's founder and the business's biggest shareholder, sold a slice of it to the Swiss food giant. She did so out of fear that France's Socialist Party would win the 1974 elections and nationalise her family's business, which in France is regarded as one of the jewels in the crown of its corporate world and even part of the nation's identity.

Nestlé's management has claimed that the deal does not represent a step away from L'Oréal and that Nestlé remains committed to L'Oréal for the long term. The deal, however, will end speculation that Nestlé is aiming to eventually take over L'Oréal entirely.

L'Oréal shares leapt in value the day before the deal was announced, but then fell, reflecting the fact that many in the market expected a larger purchase and a greater increase in L'Oréal's earnings per share. Nestlé's shares also peaked and then fell.

Thinking like a...


Swap shop

This deal is a good illustration of how many M&A deals are more complicated than a buyer paying a seller for a business with cash. Like this one, many M&A deals involve complex horse trading in parts of a range of businesses. In the end L'Oréal paid for this deal by giving up its half of Galderma, but there was speculation that it might sell its 9 per cent stake in French drug company Sanofi. L'Oréal has held this stake for 40 years, but has not ruled out swapping it for something better, should the right opportunity come along.


Cross purposes

At the moment Nestlé is claiming that it's still best friends with L'Oréal, but crunch time is coming. In April this year, a clause in the legal documentation binding Nestlé' and the Bettancourt family together that forbids both parties from selling their stake in L'Oréal without first offering it to the other is due to expire. Nestlé has made it clear it will not be seeking to renew this clause, which suggests it would like to make sure it has as much freedom as possible in the event it decides to disentangle itself from L'Oréal.


Share out

The shares bought by the Bettancourt family will be cancelled by L'Oréal. Why would they choose to do so? Because taking these shares out of play will reduce the total number of L'Oréal shares in circulation, meaning L'Oréal's earnings per share figure will rise, perhaps by as much as 5 per cent within a year, L'Oréal has said. This shift is important as earnings per share is seen by auditors and other accountants who assess businesses as a key measure of corporate success.


An apple a day

So what's the strategy behind Nestlé's decision to move out of L'Oréal and into skin pharmaceutical company Galderma? Speculation in the corporate world is that food giant Nestlé wants to turn itself into a food/pharmaceutical hybrid, which seems to be a good strategy as Europe's population becomes ever more obsessed with healthy eating and, in Nestlé's European heartland at least, increasingly old. Elsewhere in its business, Nestlé has long been active in the baby food/health market, and has also been developing products that are part food and part medicine known as "nutraceuticals".