September 22, 2017 / 1:43 PM / a year ago

Breakingviews - Nestlé’s L’Oréal stake is ready for a makeover

LONDON (Reuters Breakingviews) - Nestlé’s stake in L’Oréal looks ready for a makeover. The death of Liliane Bettencourt, whose family is the French cosmetics group’s largest shareholder, will revive the debate about the Nescafé owner’s 23 percent stake. Offloading it is the best solution. Putting 24 billion euros of value to better use could become Nestlé Chief Executive Ulf Mark Schneider’s big challenge.

FILE PHOTO: Liliane Bettencourt (L), heiress to the L'Oreal fortune leaves with Jean-Victor Meyers, her grandson, the L'Oreal-UNESCO prize for women in Paris, France, March 29, 2012. REUTERS/Benoit Tessier/File Photo - RC1DAA2233F0

The Swiss group made a stellar return on its investment of about 300 million Swiss francs (260 million euros) in the 1970s. Yet the shareholding provides a low yield and is a poor fit with its new focus on consumer healthcare.  Though executives may in the past have dreamed of owning L’Oréal, a 100 billion euro-plus offer now looks highly unlikely.

Activist Dan Loeb, who disclosed a stake in the Kit Kat maker in June, is the latest investor to argue that Nestlé should offload its investment. He suggested an exchange offer, where Nestlé shareholders swap their stock for shares in L’Oréal.

That approach has its drawbacks, though. Say investors were able to exchange 2.4 Nestlé shares for each L’Oréal share – an effective discount of 7 percent to the French group’s market price. Assuming the offer was fully taken up, the Swiss group’s earnings per share would be unchanged, Breakingviews calculations suggest – though its stock might trade at a higher multiple. Some investors would also be subject to a 35 percent Swiss withholding tax, only part of which could be clawed back.

Another option is for L’Oréal to buy back the shares.  With net cash on its balance sheet and a stake in pharmaceutical group Sanofi that could be sold, the French group is in a position to buy. However, it would need to be careful that the move did not force the Bettencourt family to make a mandatory offer for the whole company. The death this week of the clan’s 94-year-old matriarch could flush out other bidders. Either way, Nestlé would be exempt from Swiss capital gains tax provided it sold in sufficiently large chunks.

In that scenario, the question would be what to do with the windfall. Shareholders would probably demand a special dividend; the company might prefer acquisitions to spruce up its tired brand portfolio. Given Nestlé’s recent tepid performance, Schneider’s challenge is to persuade investors the company can be trusted to unlock the value tied up in L’Oréal.


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