L’Oréal shows building stakes in a rival might just be worth it
Galderma shareholders’ best case is that French group’s stakebuilding is prelude to full takeover
It is rarely a good look for a listed company to buy a minority stake in another, however glamorous the target’s prospects may be. There is no reason why a company should be better than its shareholders at stockpicking, and investors should be free to make their own mistakes.
Corporate finance orthodoxy doesn’t necessarily dissuade executives from having a go. Witness the web of interlocking stakes that US tech companies have woven with impunity, including Nvidia’s investments in OpenAI and Intel. And sometimes there are genuine reasons why tying up capital in this way creates value.
L’Oréal, which this week doubled its stake in Swiss skincare company Galderma to 20 per cent — a shareholding worth SFr8bn ($10bn) at current market value — provides an example. Neither of the two reasons the French company posits for its investment is watertight, but there is an unmentioned third that would make the whole thing worthwhile.
First, the bad. L’Oréal highlights Galderma’s “solid growth journey”. It is true that the group’s injectable aesthetics — treatments similar to Botox, which make up more than half its revenue — are part of a niche expected to grow at roughly twice the rate that skincare products are delivering at present, according to Berenberg analysts. L’Oréal might want to coattail on Galderma’s prospects, but that’s something its investors can do by themselves.
Second, L’Oréal mentions the potential for board seats and for collaborating with Galderma on “scientific partnerships”. This gets half a point. There may well be a market opportunity for products that straddle Galderma’s medical approach to skincare and L’Oréal’s lotions and potions. But the parties could as easily strike commercial agreements without buying shares.
What about the third potential reason? While L’Oréal says it will continue to support Galderma’s “independence”, the best case for its shareholders would be if its stakebuilding were the prelude to a full takeover. As well as potential new product launches, the companies would probably be able to cut a healthy slug of costs.
True, buying the company in stages may increase the overall cost of the transaction, as Galderma realises more of its potential. But its backers — a consortium led by private equity group EQT — still own a chunk of shares, and may not want to immediately sell. And the extra cost is probably worth it if L’Oréal gets time to learn the mechanics of a new category, lowering future integration risk. Warren Buffett likes to say that the more you learn, the more you’ll earn. L’Oréal should take that to heart.