* L'Oreal shares climb 5 pct, Nestle little changed
* Bloomberg said Nestle looking to cut L'Oreal stake
* Analysts see L'Oreal buying the stake, boosting EPS
(Adds analysts' comment and background; updates share price)
By Leila Abboud
PARIS, Feb 10 L'Oreal shares climbed 5
percent on Monday on speculation the French cosmetics group
might buy some of Nestle's 30 percent stake in the
company, in a move that would boost its earnings per share.
Bloomberg reported on Friday that Swiss food group Nestle
was looking at ways to reduce its L'Oreal stake, which is
currently worth more than 23 billion euros ($31 billion). Nestle
and L'Oreal declined to comment on the report.
"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 it is open to.
Analysts estimated buying back Nestle's stake could boost
L'Oreal's earnings per share by as much as 20 percent but would
not materially alter Nestle's earnings.
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
Nestle is under pressure to make its intentions clear
towards 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 Bloomberg report came out just a few days before
Nestle's annual results on Thursday, when management will likely
be grilled on its intentions. Some analysts say Nestle may try
to hold out until its annual shareholders' meeting in mid-April
to clarify its position.
L'Oreal is due to report results on Monday afternoon.
L'Oreal Chief Executive Jean-Paul Agon said last year the
French group had the financial firepower 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.
"Given Nestlé's decision to embrace a more rigorous approach
to capital discipline it seems logical to us that Nestlé will
take seriously what is likely, in our view, to be its biggest
capital allocation decision of the next decade," RBC Capital
"We see little benefit to Nestlé's shareholders' in Nestlé
retaining its stake in L'Oréal ... individual shareholders can
buy L'Oréal shares themselves if they feel it's a good
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 in total following Monday's rise.
The Swiss group has been a major shareholder in L'Oreal
since 1974, when L'Oreal heiress Liliane Bettencourt, now the
world's richest woman, entrusted nearly half her stake to Nestle
for fear it would be nationalised if Socialists came to power.
According to a shareholder pact agreed in 2004, Nestle
cannot increase its stake until six months after Bettencourt
dies. Bettencourt and Nestle also promised not to sell their
stakes without first offering it to the other until April 29,
2014, 40 years after the initial deal was signed.
Nestle Chairman Peter Brabeck, who has a remit to review the
future of the stake, said in August he wanted to keep all
options open. Nestle, which had 3.9 billion Swiss francs ($4.4
billion) in cash on its balance sheet as of end-June, does not
need to raise funds.
The Swiss firm is trying to reduce its reliance on processed
foods and develop higher-margin products with a focus on
"nutrition, health and wellness" and is seeking 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 have 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 drugmaker could be a buyer of the stake, calling such
a deal potentially "very accretive" to earnings.
L'Oreal shares were up 4.13 percent at 128.6 euros by 1605
GMT, while Sanofi shares were up 1.8 percent. Nestle shares were
up 0.5 percent.
($1=0.8982 Swiss francs)
(Additional reporting by Martinne Geller and Anjuli Davies in
London, and Astrid Wendlandt and Pascale Denis in Paris; Editing
by David Evans and Mark Potter)