Analysis: Fate of $23 billion L'Oreal stake points to future of Nestle

Tue Sep 10, 2013 12:49pm EDT
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By Astrid Wendlandt and Silke Koltrowitz

PARIS/ZURICH (Reuters) - Marriage, divorce or continued cohabitation? Nestle, the world's biggest food company, is under pressure to make its intentions clear towards L'Oreal, its partner of 40 years, when the ties that bind them loosen next year.

The decision is the preserve of long-serving Chairman Peter Brabeck, who is trying to reposition Nestle away from reliance on processed foods toward higher-margin products with a "nutrition, health and wellness" profile.

One can argue that L'Oreal's cosmetics and shampoos are compatible with that mission, but eight of the nine analysts that spoke to Reuters thought Nestle was likely to sell down its holdings in L'Oreal, once restrictions on doing so end in April.

They think the company can sell the stake, worth 23 billion euros ($30 billion), in tranches and use the cash on something central to its own business or return the cash to shareholders.

"If investors want to invest in L'Oreal, they can invest directly in L'Oreal," said a consumer industry banker who spoke on condition of anonymity. "They don't need Nestle for that."

The Swiss food group has been a major shareholder in the French cosmetics firm 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 nationalized if Socialists came to power.

It turned out to be a great investment for Nestle, as L'Oreal shares have yielded a total return of 15 percent on an annualized basis since then. Nestle's own shares yielded 11.6 percent.

Nestle owns 29.5 percent and Bettencourt owns 30.5 percent of L'Oreal, the firm her father founded as a maker of hair dye. The heiress is now 90 and under the guardianship of family members since a court fight ended with a 2011 ruling that she was incapable of looking after her fortune.   Continued...

A Nestle logo is pictured on a factory in Orbe April 20, 2012. REUTERS/Joao Vieria