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French cosmetics firm L'Oreal is buying 8 per cent of its shares from Swiss food group Nestle for Euro 6.5 billion ($9 billion), loosening their 40-year partnership and allowing both firms to boost earnings per share.
However, Nestle said on Tuesday the deal was not the start of a full exit from L'Oreal, leaving some uncertainty over the future of its remaining 23 per cent stake in the maker of Garnier shampoo and Lancome creams.
"This transaction is a bit of a letdown," Liberum Capital analysts said in a note, referring to media reports that L'Oreal might buy a larger proportion or even all of Nestle's stake.
"We assume speculation may continue regarding Nestle's future plans. Sell to a third party? Sell more in the future to L'Oreal?"
At 0940 GMT L'Oreal shares, which had leapt on Monday on speculation of a larger stake purchase, were down 2 per cent at Euro 126.4. Shares in Nestle, home to Gerber baby food and Kit Kat chocolate bars, were down 1 per cent at 66.9 Swiss francs.
"I do not see this as a first step of leaving L'Oreal ... not at all," Nestle Chairman Peter Brabeck told reporters, describing the Swiss group's stake in L'Oreal as "strategic".
"We are in here for the long haul," he added.
Nestle became a L'Oreal shareholder in 1974 to protect the group from being nationalised if the Socialists took power.
Under their pact, Nestle and L'Oreal heiress, Liliane Bettencourt, the world's richest woman, promised not to sell their stakes without first offering them to the other until April 29, 2014 - 40 years after the initial deal was signed.
L'Oreal, which on Monday posted forecast-beating quarterly sales, will cancel all the shares it buys from Nestle, boosting its earnings per share by more than 5 per cent.
However, it will have to wait to buy more shares - if it is offered the opportunity - as French rules put limits on how regularly companies can cancel shares.
The deal will cut Nestle's stake in L'Oreal to 23.29 per cent from 29.4 per cent while the Bettencourt Meyers family's stake in L'Oreal will increase from 30.6 per cent to 33.31 per cent.
L'Oreal Chief Executive Jean-Paul Agon explained how the two European consumer goods groups agreed on the 8 per cent figure:
"Nestle's stake reduction had to allow it to remain a strategic shareholder ... while making sure that the Bettencourt family stayed below the 33.33 per cent level." Beyond that level, the family would have to make an offer for the rest of L'Oreal's share capital.
Share buyback
The deal will be funded by Euro 3.4 billion in cash and the sale by L'Oreal to Nestle of its 50 per cent stake in their Galderma dermatology joint venture for Euro 3.1 billion including debt, paid by Nestle in L'Oreal shares.
Nestle said it would use the cash proceeds to launch a share buyback, without disclosing details.
"In reality, I think it is as close to maintaining the status quo as politically possible given L'Oreal's desire to take some of the stake back and the fact Nestle didn't need to sell," Jon Cox, analyst at Kepler Cheuvreux said.
The Swiss group, which has been developing its health and wellness operations in recent years, is trying to maximise its use of capital and dispose of non-core assets.
The price per L'Oreal share used for the transaction is Euro 124.48, corresponding to its average closing price between November 11, 2013 and February 10, 2014.
L'Oreal said the deal would not involve selling its 9 per cent stake in drugmaker Sanofi, worth $12 billion. Sanofi shares fell 1.4 per cent. Analysts believe Sanofi could have boosted earnings by buying back L'Oreal's stake.
In order to reflect the change of Nestle's stake in L'Oreal's governance, the number of Nestle representatives on L'Oreal's board of directors will be cut from three to two.
