REFILE-UPDATE 1-L'Oreal shares jump on Nestle stake sale hopes

Mon Feb 10, 2014 9:23am EST

(Adds background, more analyst comment, dropped words in paragraph 6)

By Leila Abboud

PARIS Feb 10 (Reuters) - L'Oreal shares climbed 5 percent on Monday after a report that food maker Nestle was studying options to reduce its 30 percent stake in the French cosmetics group, now worth more than 23 billion euros ($31.3 billion).

Investors were betting that L'Oreal would buy the stake from Nestle over time, a move analysts estimate could boost L'Oreal's earnings per share by as much as 20 percent. It would not materially alter Nestle's earnings, they said.

Other options for Nestle's exit include selling the shares to the Bettencourt family, the largest shareholder in L'Oreal with 30.9 percent, selling on the public market, or selling to a third party.

"We believe that the most likely outcome is that L'Oreal purchases the stake from Nestle via a conventional share buyback," said Exane BNP Paribas analysts. They added that Nestle's own acquisition intentions could be "somewhat more material" than the bolt-on deals it has said to be open to.

Bloomberg reported on Friday that Nestle has told L'Oreal of its intentions and the two companies have discussed the issue with banks, though no decision over the possible timing of any sale has been made.

The Swiss foods group is under pressure to make its intentions clear toward L'Oreal, its partner of 40 years, when a key plank of the shareholder pact that binds them ends in April, investors have told Reuters.

The report has come just a few days before Nestle's annual results are due on Thursday, heightening speculation that it may comment on its intentions and would have informed L'Oreal ahead of time. L'Oreal is due to report results on Monday afternoon.

"We think it likely Nestle will announce a decision regarding the future of its shareholding in L'Oréal," UBS said in a note about the Swiss group's forthcoming results.

"Should management decide to sell and use the proceeds to fund a share buy-back, we expect it would be modestly accretive to earnings and would likely be seen as evidence of greater capital discipline."

L'Oreal Chief Executive Jean-Paul Agon said last year the French group had the financial fire power to buy back Nestle's stake - ending years of silence on the issue.

However, such a deal could take years to complete as companies are limited in the amount of share capital they can cancel every two years after they bought back the shares.

NON-CORE ASSETS

Nestle, which owns brands such as Kit Kat chocolate bars, Gerber baby food and Alpo pet food, owns 29.5 percent of L'Oreal, the world's biggest cosmetics group, worth about 78 billion euros following Monday's rise.

The April 2014 expiry of a 10-year right of first refusal agreement with the Bettencourt family should make it easier for Nestle to sell, though it has no urgent need to do so, given that it had 3.9 billion Swiss francs ($4.34 billion) in cash on its balance sheet at the end of June and generates earnings before interest, tax, depreciation and amortization of around 18 billion Swiss francs.

Nestle Chairman Peter Brabeck, who has a remit to review the future of the stake, said in August that he wanted to keep all options open.

Nestle, which has been developing its health and wellness operations in recent years, is trying to maximise its use of capital and dispose of non-core, under-performing assets.

In December, Nestle sold its 10 percent stake in Givaudan , raising expectations that a sale of L'Oreal shares could follow. It also recently struck deals to sell its PowerBar, Jennie Craig and U.S. frozen pasta businesses, and is reviewing a possible sale of its frozen food unit Davigel, sources told Reuters.

Shares in Sanofi also rose on Monday as investors bet that any move by L'Oreal to buy its shares from Nestle would prompt it to sell its 9 percent stake in Sanofi, worth $12 billion, to finance the deal.

Sanofi Chief Executive told Reuters in a recent interview the French drug maker could be a willing buyer of the stake, calling such a deal potentially "very accretive".

L'Oreal shares were up 4.7 percent at 129.35 euros by 1246 GMT, while Sanofi shares were up 1.9 percent. Nestle shares were up 0.5 percent.

($1 = 0.7343 euros) ($1 = 0.8982 Swiss francs) (Additional by Martinne Geller in London and Astrid Wendlandt in Paris; Editing by David Holmes and David Evans)