How Third Point's Nestlé Move Could Affect L'Oréal

By Nick Kostov Features Dow Jones Newswires

Is Nestlé SA's stake in L'Oréal SA in play?

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Daniel Loeb's Third Point hedge fund on Sunday disclosed a $3.5 billion stake in Nestlé, amounting to about 1.25% of the company. It is demanding a series of moves to boost shareholder return, including a review of the Swiss food giant's EUR24.4 billion, or about $27.4 billion, stake in French cosmetics firm L'Oréal.

Nestlé hasn't commented specifically on its intentions but said in a brief statement Monday that it " remained committed to executing our strategy and creating long-term shareholder value." The company's newly installed chief executive, Mark Schneider, has made a number of big moves in recent months amid flagging growth.

Shares of Nestlé rose 4% Monday after news of Mr. Loeb's investment, adding pressure on Mr. Schneider to take action. Shares of L'Oréal were up 3.9%.

Nestlé and France's Bettencourt family, heirs of L'Oréal founder Eugène Schueller, held roughly equal stakes in the cosmetics giant for decades. In 1974, the family sought an outside investor amid fears at the time over French government nationalization.

For almost as long, the two companies have resisted pressure from analysts and investors to decouple. Critics complain the two don't share common strategic goals and would be better untethered.

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In 2014, L'Oréal bought back 8% of shares held by the Swiss company in exchange for cash and part of their dermatologic joint venture, Galderma. As part of its partial retreat, Nestlé gave up one of its three board seats, but continued to own 23% of L'Oréal. All that raised new questions about whether Nestlé would remain a major shareholder much longer.

In recent quarters, L'Oréal has pulled away from competitors in terms of organic sales growth by investing in the marketing of its brands, which include Yves Saint Laurent Beauté, Kiehl's and Garnier. But the investment has affected margins growth, which has lagged behind historical levels. Many of its rivals, meanwhile, have been cutting costs to boost profits.

If Nestlé does move to rid itself of L'Oréal shares or further cut its stake, there are several ways it could do that. An outright sale might be difficult, considering the size of its stake, which is currently worth $27.4 billion -- a big price tag for noncontrolling ownership.

Although Nestlé has an agreement with the Bettencourt family setting rules on what it can do with its stake, some of those provisions expired in 2014. Nestlé, for example, no longer needs to offer the shares first to the Bettencourts if it decides to sell them.

Nestlé could offer the L'Oréal shares in exchange for Nestlé ones, as per Mr. Loeb's suggestion. Or, a more likely option, L'Oréal could simply buy back Nestlé's stake.

To do so, it may need to sell some of its shares of French drugmaker Sanofi SA. L'Oréal's Sanofi stake was worth about EUR10.4 billion as of Friday's close. L'Oréal Chief Executive Jean-Paul Agon has long said that the Sanofi investment, which the company took on after merging pharmaceutical business Synthélabo with Sanofi in 1999, is financial, not strategic.

L'Oréal spokespeople declined to comment on the company's intentions. A spokeswoman for Sanofi also declined to comment.

"Financially, if L'Oréal wants to buy it all, they can afford to do it," said Marion Boucheron, an analyst at financial-services firm Raymond James. "The question is whether it's in their best interest strategically, rather than investing in other assets."

Write to Nick Kostov at Nick.Kostov@wsj.com

(END) Dow Jones Newswires

June 26, 2017 12:40 ET (16:40 GMT)