Nestlé Plans to Ramp up its Food and Drink Focus by Exiting Cosmetics

11 Feb 2014

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11 Feb 2014 --- Nestlé is exploring ways to reduce its stake in L’Oreal SA, which currently amounts to $30billion. The two companies are currently in talks about methods of gradually reducing the multinational food and drink giant’s 29% stake in the French cosmetics company.

The Swiss firm has made it clear that it wishes to increase its long-term focus on health and nutrition and part of this strategy involves reducing its investment in cosmetics.

A spokesperson for Nestlé confirmed that the L’Oreal investment ties up capital and it has already generated sizeable returns.

However, while Nestlé has made its long-term strategy clear, it could decide to retain its holding within L’Oreal, the producer of successful cosmetics brands such as Maybelline, if the two companies are unable to agree on a plan together.

Nestlé is reported to be sitting on more than $6 billion in cash and short-term investments so it doesn’t have an immediate plan to redeploy proceeds from a sale. The key, according to an industry insider, will be for Nestlé to sell the shares at the right price.

The company has a range of exit options. It could sell shares to L’Oreal, the Bettencourt family (who currently have a 31% stake in the cosmetics company) or the public – or, of course, a combination of the three. There is also speculation from those in the industry about whether L’Oreal might buy shares and take them out of the market, which its shareholders would like because it would increase the value of their existing holdings.

“We continue to believe that the most likely eventuality for nestle disposing of the stake is for L’Oreal itself to acquire the stake via a conventional buy-back,” said analysts at Exane BNP Paribas.

Separately, French pharmaceuticals producer Sanofi (SAN) has said it would consider buying back some of L’Oreal’s 8.9% stake in its business if it were to become available. Industry experts believe L’Oreal may consider using cash from a sale to buy back its shares from Nestlé.

Buying back Nestlé’s stake would make sense for L’Oreal, chief executive office Jean-Paul Agon said last month in an interview with Le Monde, who added that the cosmetics maker has the financial resources that would make that possible.

Nestlé can already sell its shares although it has to offer them first to the family.

Agon also commented that he was unable to see any synergies between L’Oreal and Nestlé. The companies have two joint ventures that are small parts of each company’s business.

Back in 2000 the then ceo Peter Brabeck-Letmathe proposed a stronger push into cosmetics but the board deemed that too ambitious and Brabeck-Letmathe decided instead to focus on nutrition and health, according to the company’s official history.

A spokesman for Nestlé declined to comment on its plans for moving away from cosmetics, referring only to the company’s previous statement that the future of Nestlé’s participation in L’Oreal is an important topic for the group and that the board is addressing the matter with “great attention”.

Meanwhile, industry insiders are also speculating that should Nestlé sell the stake and make an acquisition, one potential target could be Ferrero SpA, the Italian chocolatier that makes Nutella hazelnut spread. Buying Ferrero, which could cost around 22.5 billion Swiss francs, would make Nestlé the world’s biggest confectionery company, UBS AG estimated in November 2013.