LRLCY Loreal Co (PK)

By Matthew Dalton and Saabira Chaudhuri 

PARIS--Cosmetics giant L'Oréal SA said it has the financial firepower to buy the roughly $27 billion worth of its stock held by Nestlé SA, opening the door to negotiations over how to decouple two of the world's biggest consumer-goods companies.

"If one day Nestlé decides that they want to sell part of their shares or their shares, obviously we would be a buyer," said L'Oréal Chief Executive Jean-Paul Agon in an interview. "And obviously, we would buy them to cancel them."

"It would be very accretive," Mr. Agon added.

The sale would end a decadeslong relationship that stabilized L'Oreal's shareholder structure and delivered years of strong returns for Nestlé. It would also cement control of L'Oréal for Françoise Bettencourt Meyers, the only child of the late L'Oréal heiress Liliane Bettencourt. Ms. Bettencourt Meyers and her children, who currently own 33% of the shares, would see their stake rise to 43% if the sale and share cancellation were to go through.

Nestle's longstanding stake in L'Oréal has come under scrutiny since Daniel Loeb, the activist investor who built up a 1.3% stake in Nestlé last year, launched a campaign to get the Swiss consumer-goods company to sell its L'Oréal shares. Mark Schneider, Nestlé's new chief executive, has so far batted away Mr. Loeb's suggestions, saying that L'Oréal is a good investment. He hasn't, however, ruled out selling the stake.

Nestlé declined to comment.

Ms. Bettencourt's death last year has also raised questions about Nestlé's ownership. Her heirs and Nestlé have an agreement that prevents either party from increasing its stake in L'Oréal until six months after Ms. Bettencourt's death--though there is an exemption if either stake rises because the number of shares outstanding has fallen. The six-month period expires on March 21.

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 slice of L'Oréal for shares in Nestlé to fend off a feared nationalization by the French state.

To finance the purchase, L'Oréal has a cash pile that rose to EUR3 billion ($3.7 billion) from EUR1.8 billion over the course of last year. It also has a stake in pharmaceutical company Sanofi SA worth around EUR7.6 billion that it could sell to fund the buyback.

"In case that would not be enough, we've got many love letters from great banks that said they would love to lend us some money," Mr. Agon said.

Martin Deboo, an analyst at Jefferies in London, said L'Oréal has the cash flow to take on debt for the transaction.

"They would deleverage from there quite quickly. It would not be a crazy thing to do for their balance sheet," Mr. Deboo said.

L'Oréal on Thursday reported that revenue rose 4.8% last year to EUR26 billion, excluding one-off deals like last year's sale of the Body Shop. While its luxury brands grew strongly, the company has struggled to drive sales of older mass-market brands such as Revlon and Maybelline.

Mr. Loeb has repeatedly called on the Nestlé to sell its 23.29% stake in L'Oréal, saying shareholders should be allowed to choose whether they want to invest in the French beauty company.

"For them it's a nice ringfenced, passive store of value," Mr. Deboo said. "And I don't think they're in any rush to dispose of it."

Mr. Loeb has suggested the L'Oréal stake could be exchanged for Nestlé shares, saying this method would immediately flatter Nestlé's return on equity and increase its share value as per-share earnings received a boost from the reduced share count.

Nestlé has been criticized by Mr. Loeb and other investors for having something of an identity crisis. The company sells everything from chocolate and bottled water to skin cream and medicinal foods.

Last month, Mr. Loeb in a quarterly letter to investors, reiterated his call for Nestlé to sell its piece of L'Oréal saying it is unclear how a minority stake in the beauty business contributes to Nestlé's stated aim as being a nutrition, health and wellness company.

"We continue to believe that this financial investment ought to be monetized and that there are better uses for this capital," wrote Mr. Loeb.

Write to Matthew Dalton at Matthew.Dalton@wsj.com and Saabira Chaudhuri at saabira.chaudhuri@wsj.com

(END) Dow Jones Newswires

February 09, 2018 10:40 ET (15:40 GMT)

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