L’Oreal buyback of stake held by Nestle could take several years
A buyback by L’Oreal [OR FP] of the shares held by Nestle [NESN VX] could be stretched out over more than four years if the French personal care group buys the entire stake and wants to avoid launching a public tender offer open to all of its shareholders, according to several legal and banking sources.
The shareholder pact between the French cosmetics company’s two main shareholders, the Bettancourt family and Swiss food and consumer group Nestle expires in April 2014, opening up the opportunity for one of the parties to buy the other out.
L’Oreal has publicly stated that it has the financial means to buy the 29.3% stake held by Nestle, which has a current market value of EUR 22.22bn.
But French law prevents L’Oreal from buying back the full stake in one go, legal sources said. According to the “Code de Commerce”, companies can buy back a maximum of 10% of their own shares in private placements. They are permitted to exceed this amount if they launch a public buyback offer, open to all shareholders.
To avoid triggering a public offer, L’Oreal can use the mandate granted to it by its shareholders to buy back 10% of its share capital through market or off-market transactions. This authorisation is routinely granted at the annual shareholders meeting, said one lawyer.
But it may be possible to call more than one ordinary general meeting in the year, allowing the company to launch more than one 10% buyback in the period, speculated a legal source familiar with the situation.
But attempts to accelerate the buyback would still be hindered by legal limitations on the cancellation of shares. The “Code de Commerce” prevents companies holding more than 10% of its share capital at any one time. At the same time, companies are only permitted to cancel up to 10% of their shares every 24 months, sources said.
When French advertising company Publicis [PUB FP] bought the some 15% stake held by its Japanese peer Dentsu [4324 JP], three transactions were launched between May 2010 and February 2013 to buy Dentsu’s stake.
Publicis explained in its release in February 2012, that of the 18m shares it had purchased up to that date, the group cancelled 10.76m, given a previous cancellation of shares in May 2010. “Thus a total of 10% of the Group’s shares (the maximum permitted by law) has been cancelled over the past 24 months,” the statement said.
This means it would take L’Oreal over four years to buy back and cancel the entire stake.
The legal source familiar said there was possibly a way around this law, but would not be specific, other than to say the deal could be structured so that it would not be a buyback as such.
This source said it was also possible that L’Oreal could decide to launch a public buyback with a discount that would make it appealing to Nestle and not other shareholders. The large stake held by the Swiss food group means that most disposal routes would be impacted by some form of discount.
But this would be a gamble, as several shareholders could still opt into the offer, the source pointed out.
Analysts have previously predicted that L’Oreal is unlikely to buy back the stake in one go. Nestle may also be open to a gradual sell down of its stake in the absence of any transformational acquisition targets. The Swiss company is cash rich, reporting cash and cash equivalents of CHF 3.8bn and CHF 2.5bn in short term investments in its first half results for 2013.
Nestle has publicly stated it is keeping all options open in relation to the stake, including maintaining the status quo.
Nestle and L’Oreal declined to comment.
L’Oreal shares on Thursday morning were trading at EUR 125.01, giving it a market capitalisation of EUR 75.84bn.