February 9, 2018 / 8:27 AM / in 10 days

L'Oreal ready to buy Nestle stake in cosmetics leader

PARIS (Reuters) - L‘Oreal (OREP.PA) on Friday underscored its readiness to buy Nestle’s (NESN.S) 23 percent stake in the world’s biggest cosmetics firm were its Swiss shareholder to sell, saying it had access to cash and funding at its disposal.

L‘Oreal said it could finance a purchase of the holding, now worth around 22.3 billion euros ($27.4 billion), with cash, by selling its stake in French drugmaker group Sanofi (SASY.PA) or through borrowing if needed.

“If Nestle one day wants to sell, we are ready,” Chairman and Chief Executive Jean-Paul Agon told a news conference, after L‘Oreal released slightly better-than-expected fourth-quarter earnings.

The death of L‘Oreal heiress Liliane Bettencourt last September set the clock ticking on the end of 44-year-old shareholder pact between the French company’s founding family and Nestle.

The agreement prevented the Bettencourts, which have 33 percent of L‘Oreal, and the Swiss food group from raising their holdings. It is now set to expire in mid-March, stirring speculation over the shareholders’ relationship and whether Nestle might sell out or even contemplate a takeover.

Nestle had previously been at liberty to whittle down its L‘Oreal holding, however, and has yet to budge, in spite of pressure from activist investor Daniel Loeb, founder of hedge fund Third Point. Loeb has pushed for a sale among demands for the Swiss firm to speed up a strategy overhaul.

“We have 1.8 billion euros in cash, we have the Sanofi stake. We are also a very serious and loyal and active shareholder in Sanofi, but in case we will be ready and I‘m sure if it was not enough, we have many love letters from banks that have said that they would love to lend us some money,” Agon said.

Nestle and Sanofi declined to comment. Shares in L'Oreal, maker of Garnier shampoo and cosmetics labels like Lancome, were up 1.3 percent at 1413 GMT, among the top gainers on France's blue-chip CAC-40 .FCHI index. Nestle shares were up 0.6 percent, while Sanofi was 0.9 percent lower.

NO CHANGE

Nestle has so far given no signs it could sell out of L‘Oreal.

“Our approach to this investment is currently not changing,” Nestle CEO Mark Schneider told investors in September.

The L‘Oreal stake is worth about 10 percent of Nestle’s market capitalization and has contributed to its earnings, but some investors, including Loeb, think that money could be put to better use.

Loeb has praised Nestle’s chief for other recent steps such as buying back stock, buying and selling some assets and bringing new directors onto the board.

    Others say that Nestle should keep the stake until it has something else in mind to buy.

    Nestle was interested in the vitamin and supplements business being sold by Merck (MRCG.DE), but has dropped out of the running.

    L‘Oreal already bought an 8 percent stake in the firm from Nestle in 2014, and canceled the shares. That 6.5 billion-euro deal allowed both companies to boost their earnings per share.

    Buying the remaining 23 percent could be positive for L‘Oreal, some analysts said.

    “This may excite some: an acquisition of the stake by L‘Oreal, part-funded by a sale of its own Sanofi stake would be circa 10 percent accretive,” Investec Securities analysts said in a note.

    At today’s stock price, L‘Oreal’s 9 percent stake in Sanofi - a legacy from its incursion into the pharmaceuticals business in 1973, before the modern day Sanofi was formed - is worth more than 7 billion euros, according to Reuters data.

    L‘Oreal’s Agon said on Thursday he was confident of significant growth in like-for-like sales in 2018. The company, whose brand ambassadors include Helen Mirren, Eva Longoria and Blake Lively, was boosted last year by strong sales in Asia and demand for its luxury products.

    ($1 = 0.8152 euros)

    Reporting by Dominique Vidalon, Sarah White, Martinne Geller, Matthias Blamont and Pascale Denis; Editing by Alexander Smith and David Evans

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