Nestlé SA Market Cap (as of 14/02/14): CHF 213.2bn
L’Oréal SA Market Cap (as of 14/02/14): € 74.2bn

The much-anticipated decoupling of French cosmetics company L’Oréal from Nestlé, the Swiss food giant, captured headlines at the beginning of the week in light of L’Oréal’s announcement that it reached a deal to buy back 8% of its shares out of Nestlé’s 30% stake.

The partnership between the two companies, sealed 40 years ago, was drafted to allay fears that the French Socialist government at the time could move to nationalize the company build by the Bettencourt family. The agreement stipulated that both parties could not sell their cross-holdings without first offering them to the other. Up until the buyback, both Nesté and the Bettencourt family held equal 30% stakes in the French cosmetics manufacturer. The initial agreement is due to expire in April 2014 and Nestlé stated that it will not look for a renewal of the initial terms.

Buy-backs on the European market are becoming an increasing trend; many companies nowadays prefer to buy back stocks in lieu of other possible investment opportunities. L’Oréal adds its name to a string of European corporates that have opted for buy-backs in 2013, such as Siemens and Novartis. According to statistics published by Dealogic, 2013 saw European companies buying back $50.7bn of their own shares, which represents a 68% year-on-year increase. Given the slower growth of mature companies, some investors ague that buy-backs represent means for share price appreciation, and some have expressed the desire for L’Oréal to take further steps in reclaiming shares.

L’Oréal said it would buy back 8% of its share capital, currently held by Nestlé, in a deal valued at €6.5bn, with the stated goal of lifting its earnings per share by 5%. The overall deal includes an agreement that L’Oréal will barter its 50% stake in Galderma, a dermatologic joint venture with Nestlé, to finance €2.1bn of the deal, with the remaining €3.4bn being paid for in cash. Upon the completion of the deal, the Bettencourt family will bolster their stake in L’Oréal to 33%, while Nestlé will continue to claim ownership of 23% of the French company.

A number of market analysts have pointed to the fact that, under the current deal, L’Oréal will not be required to sell its 9% stake in Sanofi and abandon its status as core shareholder in the French drugmaker.

Overall, the current terms of the strategic partnership between the French and Swiss giants are due to expire this April, prompting a flurry of speculation regarding Nestlé’s remaining 23% stake in the French cosmetics company and the prospects of future buy-backs. Currently, L’Oréal and Nestlé remain equal shareholders in Inneov, a beauty nutritional supplements joint venture and the CEO’s of the two companies have issued a joint statement reiterating their support for the continued strategic partnership between L’Oréal and Nestlé.

L’Oréal retained the advice of Lazard and Michael Zaoui, a former head of European M&A at Morgan Stanley, while Rothschild acted as adviser to Nestlé.

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