In a deal announced Feb. 11, L'Oreal SA will buy back 8% if its own stock from Nestle SA and trade its stake in skin-care company Galderma SA to finance it.

The transaction will return more of L’Oreal’s ownership to its core shareholders, allowing it to renew its focus on cosmetics business growth. Nestle in turn gains a foundation for a new company division in the health and wellness space.

Nestle will sell back to L’Oreal 48.5 million shares valued at €6.5 billion ($8.8 billion), representing 8% of Nestle’s 30% stake in the company. L’Oreal will pay for the deal with €3.4 billion in cash and its half of Galderma, valued at €3.1 billion

Galderma, which markets the Cetaphil line of skin-care products and numerous pharmaceutical dermatology products, is a joint venture between the two companies. L’Oreal’s 2013 earnings report released Feb. 10 noted that Galderma sales were up 3.9% on the year to €826.3 million ($1.12 billion), “confirming the success of its innovative medical solutions.”

According to Nestle Chairman Peter Brabeck-Letmathe, the takeover of Galderma will allow the firm to “pursue its strategic development in nutrition, health and wellness by expanding its activities to medical skin treatments.”

Moreover, Galderma will become the “foundation” of a new company division to be called Nestle Skin Health SA, the exec says.

Morningstar analyst Philip Gorham said in a Feb. 11 note that the deal “shows that Nestle intends to be a leading player in health and wellness categories, and that the company's positioning will not be restricted to food, beverage and snacks categories.”

The analyst characterized the new strategy as sensible “given the strong demand from millennials for healthy, functional products, for which they are willing to pay a premium.”

In a Feb. 11 note, Sanford Bernstein analyst Andrew Wood says Nestle’s extension of its health and wellness focus into skin health makes sense.

“We have long believed that the long-term future of the food industry is in the overlap between food and pharma or between food and beauty … and it could be argued that this transaction moves Nestle towards the overlap of all three,” he said. “It highlights Nestle’s strong long-term focus on the strategic evolution of the business in-line with the needs and desires of consumers, and we view it positively.”

Nestle purchased its stake in L'Oreal in 1974, when majority shareholder Liliane Bettencourt sold nearly half of her L’Oreal holdings for a 3% share in Nestle. Under a 2004 agreement between L’Oreal and Nestle, a mutual right of first refusal between the parties was going to expire in April of 2014 Also see "Prospect Of L’Oreal Share Buyback Excites Investors" - HBW Insight, 23 September, 2013..

It is unclear how Nestle will proceed with its remaining 23% ownership share of L’Oreal. However, with the Swiss multinational’s stake in the beauty firm reduced, Nestle representatives on L’Oreal’s board will decrease from three to two, according to the release.

The deal will give the Bettencourt Meyers family – still L’Oreal’s largest shareholder – a 33.3% ownership of the firm. Nestle says it will “continue to act in concert” with the family regarding L’Oreal affairs.

For L’Oreal, the share buyback will allow the company to maintain focus on its cosmetics business and its strategy to gain one billion new consumers, according to Chairman and CEO Jean-Paul Agon.

"This transaction represents a very positive strategic move for L'Oreal, its employees and its shareholders,” he says.

Analysts initially speculated that L’Oreal would finance the share buyback by selling its own 9% stake in Sanofi, which is presently valued at €9 billion. However, the Nestle announcement makes note that the deal will not require L’Oreal’s “disposal” of Sanofi shares.

Deutsche Bank analyst Harold Thompson said in a Feb. 11 note that L’Oreal not relying on its Sanofi stake to finance the deal is a good thing for the firm. “For us, we see this as highly compelling for L’Oreal shareholders as the group maintains significant flexibility rather than be constrained for a prolonged period.”

The share buyback is expected to close before mid-year and will be accretive to L’Oreal’s 2014 full-year earnings with a 5% earnings-per-share increase.

L’Oreal Buys Back Shares From Nestle, Sells Galderma Stake

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