PARIS French cosmetics giant L'Oreal (OREP.PA) said it could raise enough cash to buy the 23 billion euro ($30 billion) stake Nestle NESN.VX holds in it but steered clear of pledging to make such a move.
The Paris-based group was responding to a suggestion by Nestle this week that it could sell its 29.5 percent stake from April, having decided not to renew its purchase contract with the L'Oreal founding family Bettencourt.
L'Oreal chief executive Jean-Paul Agon commented on the issue for the first time publicly on Friday, saying L'Oreal would have the financial flexibility to purchase Nestle's stake. But he would not be drawn on the group's plans.
"I didn't say that we wished to buy Nestle's holding," Agon told a press conference, clarifying comments made earlier to Les Echos newspaper, which quoted him as saying the group had the means to finance such a deal.
"I simply said that we have significant financial resources because of our positive balance sheet and 9 percent of Sanofi."
L'Oreal shares rose as much as 6 percent in early trading and by 1445 GMT were up nearly 4 percent at 127.5 euros, valuing France's third-largest listed group in terms of market capitalization at 77.2 billion euros.
If L'Oreal bought part or all of Nestle's stake it would help secure its independence and could also potentially boost earnings per share. Investors would expect the French group to cancel shares acquired from Nestle - within the regulatory time limits and size - to avoid letting them sit idle on its balance sheet and maximize shareholder returns instead.
"The stock is somewhat inflated by hope, expectation that Nestle will sell its stake in L'Oreal and that L'Oreal will undertake a mega buy-back of the shares, which would be significantly accretive," Bernstein analyst Andrew Wood said.
L'Oreal had net cash of 572 million at the end of June and its 9 percent Sanofi (SASY.PA) stake would be worth around 9 billion euros at current market prices.
"We have always said that our stake in Sanofi is financial and not strategic so therefore we could use it if an opportunity presented itself," Agon said on Friday, presenting the company's results for the first half.
SPECULATION HEATING UP
Nestle entered the shareholder capital of L'Oreal in 1974, invited by the French group at a time it feared nationalization if the left took power in France. The Bettencourts and their associates saw in Nestle a friendly investor, supportive of management, which would allow the family to remain the group's No.1 shareholder in the long term.
Both Nestle and the Bettencourts gave each other first right of refusal if either wanted to sell its stake, a purchase agreement which was renewed several times and again in 2009. It expires on April 29 2014.
Nestle and the Bettencourt family have been quiet in the past few years about their intentions but as the expiry date of April approaches, statements from each side emerged this month.
Last week, the Bettencourt family issued a statement saying it had no plans to sell its 30.5 percent stake in L'Oreal.
Nestle Chairman Peter Brabeck told Swiss newspaper Handelszeitung this week the group wanted to keep its options open regarding its stake, including maintaining the status quo, after having decided not to renew that agreement.
"L'Oreal's stock price will be sensitive to any comments about Nestle's stake over the next few months," said Scilla Huang Sun, who manages the $500 million Julius Baer Luxury Brands fund from Zurich. "It seems speculation is heating up about this now."
Some analysts said on Friday they did not expect Nestle to hurry in selling its L'Oreal stake after April as it did not need to raise funds.
Also, they said it was unlikely L'Oreal would want to buy the whole 29.5 percent stake at once - even if it could afford it - as it would limit its ability to make other acquisitions.
"I see a gradual sale of Nestle's stake over time as the most likely scenario and it is possible that nothing happens next year," said Eva Quiroga, analyst at UBS in London.
($1 = 0.7562 euros)
(Editing by Sophie Walker)