Nestle make their intentions clear

Last year November Sasha wrote this piece titled L'Oreal earnings ok, the Nestle stake is a big hurdle. It is a really interesting article and funnily enough I still remember reading it word for word in Santiago Chile while I was still travelling. I was at a Sushi restaurant with free wifi and read it while waiting for the food to arrive.


A big part of the article goes threw L'Oreal's history and the ownership structure. Give it a read to refresh your memory. Rumours started hitting our screens over the weekend that the two businesses had been discussing a deal. Well this morning there was an official announcement.


"Nestle and L'Oreal announced today that their respective Boards of Directors, in meetings held on February 10th, 2014, have approved by unanimous decision of their voting members a strategic transaction for both companies under which L'Oreal will buy 48.5 million of its own shares (8% of its share capital) from Nestle. This buyback will be financed: Partially through the disposal by L'Oreal to Nestle of its 50% stake in Swiss dermatology pharmaceuticals company Galderma (a 50/50 joint venture between L'Oreal and Nestle) for an enterprise value of 3.1 billion euros (2.6 billion euros of equity value), paid by Nestle in L'Oreal shares (21.2 million shares) For the remainder, corresponding to 27.3 million L'Oreal shares held by Nestle, in cash for an amount of 3.4 billion euros."


So basically they are disposing of their 50% stake in Galderma and the rest will be cash. The shares bought by L'Oreal will be disposed of which would be 5% earnings accretive. In other words, fewer shares in issue on the same earnings would juice up earnings per share by five percent after the deal was done. In the bigger scheme, the deal is still small. Nestle's stake will decreases from 29.4% to 23.29% while the Bettencourt's stake will increase from 30.6% to 33.31%. But it does indicate their intentions going forward and I would suspect this will not be the last we hear from these 2 companies and the respective deal.


The L'Oreal ADR we invest in was up 7% on the news.This is certainly positive for earnings and a good place to put their cash. As for Nestle, another stock we invest in, the share price has not moved much. It is such a big business at $240bn market cap that a transaction this size has not had much of an effect. But their focus is more on their core products and cosmetics does fall within that realm. Galderma on the other hand which focuses on Nutrition, health and wellness falls more within their future plans. With the cash received they are putting it towards their own share buyback.