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Nestle lacks a good reason to sell L'Oreal

Nestle lacks a good reason to sell out of L'Oreal. If it found itself with a knockout offer from some third-party bidder, the calculus might change. If it could prove the stake obscured value in its core businesses, it might be tempted to offload. Ditto if Nestle needed cash to fund a major acquisition - which doesn't seem on the cards. Moreover, since Nestle's net debt is only one times annual Ebitda, according to Eikon, its balance sheet is hardly stretched.

Nor can it complain about its L'Oreal stake, which has brought an average 15 per cent annual return in the last 40 years, according to Reuters. For the moment, at least, the deal logic is elusive.

Nestle has held its near-30 per cent stake in L'Oreal since 1974. Back then, fears that the cosmetics company might be nationalised led the founding Bettencourt family to hand part of their shares over to the Swiss. For 40 years, a shareholder agreement between the Bettencourts and Nestle has given each the first right of refusal over any disposal. The accord has been renewed on several occasions and expires in April 2014. This time Nestle has said it will let the agreement lapse. This has led to speculation that Nestle would like to change, or sever, its L'Oreal links.

L'Oreal, which might acquire the stock for cancellation, is one potential buyer. Such a move is likely to be earnings enhancing and it could part-fund the purchase by selling its nine per cent holding in Sanofi, the French drugs company. That is worth about ^9 billion at current market prices. L'Oreal has net cash at present and is generating strong cashflows so could probably borrow to pay the remainder.

L'Oreal might want to buy to stop a third-party bidder. But it is hard to see how and why it could offer Nestle a premium. Synergies are likely to be non-existent. Besides, the friendly status is already by itself a guarantee of the independence of the cosmetics group. L'Oreal also enjoys further implicit protection, courtesy of the French government's traditional taste for national champions.

Nestle could also in theory brave the French taboo and launch a bid for the 70 per cent of L'Oreal it does not own. This seems improbable. The Swiss company's clearly stated ambition, reiterated at investor meetings on September 30 and October 1, is to focus on nutrition and wellbeing. Even within that, some investors think Nestle already sprawls too far. Adding cosmetics to coffee, chocolate and pizzas would be, to say the least, a curious move.

If Nestle offloads, it is likely to use the money to fund a share buyback. What's lacking, however, is clear rationale for the KitKat company to make the break.