L'Oreal After Owen-Jones Could Look at Direct Sales

The departure of L'Oreal Chairman Lindsay Owen-Jones may bring the cosmetics giant one step closer to buying a direct sales company which would help it lower costs and conquer new markets, financial advisers and insiders say.

Some executives and bankers have long held a view that L'Oreal (OREP.PA) should get into direct sales to boost its penetration of emerging markets where make-up and creams are still sold door-to-door due to lack of retail infrastructure.

Owen-Jones, who turned L'Oreal from a France-centric business into the world's No.1 cosmetics maker, made no secret he was against direct sales, as he doubted the long-term viability of the business model.

He also thought door-to-door retail risked damaging the image of L'Oreal's brands.

But Owen-Jones' successor, Jean-Paul Agon, who will be elevated to executive chairman from chief executive next month, is more ambivalent.

Asked on Friday about whether L'Oreal should get into direct sales, possibly via an acquisition, Agon answered: "It is not on the agenda but nothing is taboo."

While Agon has no immediate plans to buy a company like U.S. based Avon (AVP.N) or even a smaller target like Brazil's Natura (NATU3.SA) or Sweden's Oriflame ORISdb.ST, he is open to discussing the idea, financial advisers say.

Natura and Oriflame would fit the French group's ambition to strengthen its presence in the natural products segment, which it began building up with the acquisition of Body Shop in 2006.Oriflame, which makes about 70 percent of sales in central and Eastern Europe, is regularly the target of speculation it could be taken over by a larger group but a source close to the company said this week there were no concrete talks at present.

"The file is closed but that doesn't mean it couldn't open again," said one banker.

Getting into direct sales would help L'Oreal meet its ambition of winning 1 billion new customers over the next 10 years in regions such as Asia, Latin America and Eastern Europe.

Agon told Le Figaro newspaper in an interview published on Friday that L'Oreal was considering making an acquisition in Brazil or India but did not give any detail.

L'Oreal is sitting on 1.550 billion euros of available cash, which Agon said on Friday he planned to use for acquisitions.

In an effort to show the group was actively scouting, Agon on Friday said L'Oreal had looked at all of the targets purchased by rivals last year.

The group also has nearly no debt and it is facing the lurking threat that Nestle (NESN.VX), which holds 30 percent of the company, may decide at some point to take it over.

Brokers at Exane BNP Paribas have argued that L'Oreal could make a 20 billion euro acquisition in part to avoid the prospect of avoiding a share buyback and therefore sending money back to Nestle.

"My interpretation is that this would be a very defensive acquisition for L'Oreal, a sort of poison pill to protect it against a Nestle takeover," one London-based analyst said about the prospect that L'Oreal could buy Avon.

LOOKING AT AVON

There are also persistent rumors, never denied by L'Oreal, that the company could make a bid for Avon in the next couple of years in part to bolster its presence in Latin America.

"I don't think they will buy Avon but they should," said an executive who works at L'Oreal but declined to be named. "It takes a long time to shift the culture of the company. There are discussions..."

Avon, known for its army of 'Avon ladies' who sold cosmetics door to door in the 1950s, has, like L'Oreal, engineered a shift to focus on developing markets but is struggling in Brazil.

Buying Avon, worth roughly $18 billion, would be both a massive investment, akin to Sanofi-Aventis's purchase of Genzyme, and a break from the past for a company that still has the conservative culture of a family-run concern.

More likely, bankers say, is that L'Oreal spends its war chest on a smaller direct sales company like Natura if and when these firms go on the market.

"L'Oreal has a wish list and Natura is right at the top of it," said a Paris-based banker. "But their (Natura's) shareholders don't want to sell, and the price is not cheap."