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Attention shifts to Nestlé's $29B L'Oreal stake after sale of skin health unit

Nestlé SA has moved a step closer to shedding its skin health business for CHF10.2 billion. Such a deal may one day pave the way for disposing the $29 billion stake it owns in cosmetics giant L'Oréal SA.

The sale of the skin health unit to a consortium led by Swedish private equity firm EQT Partners AB and the Abu Dhabi Investment Authority's Luxinva unit, one of the largest deals in the consumer sector in recent years, was approved July 17 by the European Commission. A Nestlé spokesman told Market Intelligence that it has also gained antitrust clearance from the authorities in the U.S. and that the transaction is expected to close in the second half of 2019.

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The disposal is part of a broader Nestlé plan to sell underperforming and noncore units and focus more on food, drink and nutritional health. The Vevey, Switzerland-based company has been under pressure to boost growth since 2017. That was when activist shareholder Third Point LLC, run by American billionaire Daniel Loeb, disclosed a $3.5 billion stake in Nestlé and pushed its management to raise margins, increase innovation and off-load nonstrategic assets. One of the most significant outcomes of the latest transaction is that it could pave the way for a much larger one — the sale of Nestlé's 23% stake in France's L'Oreal, which Loeb has urged the company to sell.

The skin health business has 5,000 employees and reported sales of CHF2.8 billion in 2018. It makes Proactive and Cetaphil skin care products, prescription dermatology drugs and a Botox rival called Dysport. It was created in 2014 from a joint venture called Galderma originally run by Nestlé and L'Oreal. The Swiss company hoped that higher-growth dermatology products would offset a slowdown in its traditional food operations. It did not work out.

"Nestlé Skin Health is a business where we have been facing some difficulties a few years back," said Francois-Xavier Roger, Nestlé CFO, at a Sanford Bernstein conference held in London in September 2018. "We did a massive restructuring effort that led to the reduction of the head count by 20% [and] closed the industrial site, research centers and so forth. Now we are back to a decent level of margin" with sales growing at the high single-digit level.

Nestlé CEO Mark Schneider has overseen several other asset disposals since taking the helm of world's largest food and drink company in 2017. These include the April 2018 sale of the U.S. confectionery business to Ferrero SpA for $2.8 billion and the $1.55 billion sale of the Gerber Life Insurance business to Western & Southern Financial Group announced in September 2018. In February, Nestlé said it had embarked on a strategic review, including a possible sale, of its Herta packaged meat business, which reported revenue of CHF680 million in 2018.

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But the most eye-catching potential transaction would be the sale of Nestlé's 23% stake in L'Oreal, which has given the Swiss giant years of strong stock market returns and is worth about $29 billion at the current share price. Nestlé first bought into L'Oreal in 1974 as a "white knight" to help the cosmetic company's founding family, the Bettencourts, protect it from hostile takeovers and nationalization. Neither occurred. The Bettencourts are the largest shareholder of L'Oreal, with a 33% stake, while Nestlé is the second-largest.

In 2017, the death of L'Oreal heiress Liliane Bettencourt reignited speculation that Nestlé might sell its stake back to the family. A 2004 agreement prevents either party from increasing its ownership in L'Oreal until six months after Ms. Bettencourt's death; that deadline expired March 21, 2018. Loeb's sustained calls for a sale has only added to the speculation, but Nestlé is coy about its plans. Some analysts believe that Nestlé could sell its valuable L'Oreal shares if it needs to fund a major acquisition down the road.

"I can only tell you that there are a certain number of options and we want to keep the options totally open," said Roger, Nestlé's CFO, at the London conference. "We do review these options regularly with the board. ... Whatever we do with it, it will have a strategic impact on Nestlé because of its value."

EQT has said it plans to continue to invest in research and development to grow the skin health business, to launch new products in the U.S. and expand the consumer health business internationally. The Nestlé unit will be renamed Galderma, after its legacy brand prior to being bought by Nestlé in 2014. The headquarters will remain in Switzerland.

As of July 17, the syndication of a CHF3.55 billion loan backing the EQT-led buyout was nearing the finishing line, according to Leveraged Commentary and Data, or LCD, a unit of S&P Global. Investors in the loan interviewed by LCD said EQT is paying a fairly hefty multiple for the business, writing one of the largest equity checks for a European transaction this year. Given that the skin health business's three units have no product overlaps, it may prompt the new owners to hive off some assets, they added.