Nestlé S.A. NSRGY 2.17% has agreed to reduce its stake in L’Oréal SA in a $10 billion deal that allows the world’s biggest packaged-foods maker to capitalize on a rally in the French beauty giant’s share price.
The maker of Nescafé coffee and Purina petfood said it would sell 22.26 million L’Oréal shares back to the French company, paring its stake to about 20% from 23%. Nestlé will use the proceeds to help fund its own 20 billion Swiss francs, approximately $21.6 billion, share-buyback program.
The Swiss company has been one of L’Oreal’s top shareholders for decades, an unusual alliance among two of the world’s biggest consumer- goods companies. Nestlé’s position dates back to 1974, when France’s Bettencourt family, heirs of L’Oréal founder Eugène Schueller, sought an outside investor amid fears the French government could nationalize the business. Nestlé and the family held roughly equal stakes in L’Oréal until 2014 when L’Oréal bought back 8% of shares held by the Swiss company.
Nestlé for years has faced pressure from analysts and investors to sell its shares in L’Oréal. The issue took on renewed significance in 2017 when billionaire activist investor Daniel Loeb’s hedge fund Third Point LLC took a stake in Nestlé and called on its then new chief executive, Mark Schneider, to sell L’Oréal shares, saying the position wasn’t strategic. Nestlé has repeatedly defended the investment, saying it has delivered good returns.
Nestlé didn’t say why it had decided to trim its position, or comment on what it planned for its remaining sizable holding. It will retain two board seats at L’Oréal.
Analysts and investors appeared to welcome the deal Wednesday, with Nestlé shares trading 1.6% higher in morning trading in Europe and L’Oréal stock up 1.4%.
Lately, L’Oréal shares have been on a tear, up 31% since the start of the year through Monday. Analysts have praised the French company’s e-commerce strategy, speed at responding to new trends and exposure to high-growth categories like upscale skin care, fragrances and makeup.
“When your financial investment reaches all-time-highs, it is not surprising that you monetize some of it,” said Bernstein analyst Bruno Monteyne. He said he thought the sale was also logical given the absence of any sort of business partnership between the two, which operate in largely different categories.
L’Oréal sells skin care, fragrances, hair color and cosmetics with brands including Lancôme, Kiehl’s, Garnier and Maybelline New York. Nestlé’s array of mainly food-focused businesses includes coffee, pet food and baby food.
Nestlé is selling its L’Oréal shares at €400, equivalent to $451, a piece, a discount of almost 6% to the company’s closing price Tuesday but a 3% premium over the average price of the last three months, according to analysts at RBC. The move “continues Nestlé’s process of smart capital allocation under CEO Mark Schneider, in our view, and we welcome it,” said RBC analyst James Edwardes Jones.
L’Oréal said it would cancel the repurchased stock, which would boost its earnings per share. The Bettencourt Meyers family’s stake in L’Oréal will increase from 33.3% to 34.7%. L’Oréal said the family has received a waiver from the French stock market regulator so it doesn’t have to file a public offer for the company despite crossing the ownership threshold of one-third of its shares.
Write to Saabira Chaudhuri at saabira.chaudhuri+1@wsj.com
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Appeared in the December 9, 2021, print edition as ‘Nestlé Agrees to Cut L’Oréal Stake To 20% in a $10 Billion Share Sale.’
