L’Oreal SA, the world’s largest cosmetics maker, agreed to buy back 8 percent of its stock from Nestle SA for 6 billion euros ($8.2 billion), the first sale of shares by the Swiss company after four decades of ownership.

L’Oreal will pay 3.4 billion euros in cash for 27.3 million shares and exchange its half of the Galderma skincare joint venture for a further 21.2 million shares, the Paris-based maker of Maybelline mascara said in a statement.

The buyback will boost L’Oreal’s per-share earnings, while sharpening Nestle’s focus on nutrition and health products. Nestle considers its remaining stake to be “strategic” and will be held for the long-term, Chairman Peter Brabeck-Letmathe said today in Paris. The transaction doesn’t represent a disengagement from the cosmetics company, he said, though some analysts suggested that the sale may be just the beginning.

“The eventual disposal of Nestle’s entire holding in L’Oreal is the logical conclusion,” said James Edwardes Jones, an analyst at RBC Capital Markets in London. “That said, we wonder if there will be a slight feeling of anticlimax on the part of investors given that it looks as if the disposal will be done piecemeal and there is no clarity on the end game.”

L’Oreal rose as much as 4.5 percent in Paris trading before sliding back 2.3 percent to 126 euros at 11:13 a.m. The stock advanced 4.5 percent yesterday after Bloomberg News reported that Nestle was exploring ways to reduce its stake.

Nestle slipped 0.9 percent to 66.95 Swiss francs in Zurich. It will own 23.3 percent of L’Oreal following the completion of the transaction, down from 29.4 percent.

 

Bettencourt Stake

 

L’Oreal is paying 124.48 euros a share and all the stock purchased will be canceled. The stake held by the Bettencourt family, the billionaire heirs of the cosmetics maker’s founder, will increase to 33.3 percent from 30.6 percent. Liliane Bettencourt is Europe’s wealthiest woman, according to the Bloomberg Billionaires index. Nestle’s number of seats on the L’Oreal board will drop to two from three.

“This is as close to maintaining the status quo as was politically possible given L’Oreal’s interest in taking the stake,” said Jon Cox, an analyst at Kepler Cheuvreux in Zurich.

Today’s transaction assigns an equity value of 2.6 billion euros to L’Oreal’s half share in Galderma, a Lausanne-based joint venture between the companies that was created in 1981 and had sales of 2 billion francs ($2.2 billion) last year.

Galderma makes treatments for acne and psoriasis. Nestle said the fully-owned company will become part of a new division known as Nestle Skin Health SA, which will sell products ranging from drugs to medicated soaps, sunscreens and medical devices for skin, hair and nails.

 

Too Ambitious

 

The question of what to do with the L’Oreal holding has taxed Nestle since 2000, when Brabeck was CEO and proposed a stronger push into cosmetics. The board deemed that too ambitious and Brabeck decided instead to focus on nutrition and health, according to the company’s official history. In addition to his Nestle role, Brabeck is a vice chairman of L’Oreal.

The impact of today’s transaction on Nestle’s earnings will probably be minor, according to Jean-Philippe Bertschy, an analyst at Bank Vontobel. While it will mean less profit from the L’Oreal stake, there will be accretion from the Galderma holding, Bertschy wrote in a note. Nestle could also use proceeds to buy back 4 percent of its own stock, said Patrick Hasenboehler, an analyst at J. Safra Sarasin.

 

Sanofi Stake

 

L’Oreal said the transaction will boost earnings per share by a recurring 5 percent on an annual basis. The buyback will be financed exclusively with cash and issuance of commercial paper and won’t require the sale of its stake in French pharmaceuticals maker Sanofi SA, the cosmetics company said. Sanofi shares fell as much as 2 percent after today’s announcement and traded 0.4 percent higher at 72.25 euros at 11:14 a.m.local time.

“The agreement allows us to continue the big adventure of L’Oreal in an independent manner,” Chief Executive Officer Jean-Paul Agon said at a Paris press conference.

L’Oreal said late yesterday that it’s confident of outperforming the global cosmetics market this year after reporting fourth-quarter organic sales growth that topped analysts’ estimates. Nestle reports earnings on Feb. 13.

The transaction is expected to close before the end of the first half. Nestle was advised by Rothschild, Brabeck said. Lazard Ltd. and BNP Paribas advised L’Oreal, Agon said.

 

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