A makeover for L’Oréal

After the death of Liliane Bettencourt, Nestlé could sell its stake in L’Oréal – or buy the whole firm. Alice Gråhns reports.

The death last week of Liliane Bettencourt (see page 41) could reshape the ties between two of Europe’s largest firms. Her passing starts a six-month countdown to the expiry of an agreement between the Bettencourt family, the largest shareholder in L’Oréal, and Swiss multinational Nestlé, the cosmetics giant’s other key shareholder. Nestlé has owned a stake in L’Oréal since 1974, when Bettencourt sought a co-investor to protect the company from state takeovers. A later agreement, drawn up in 2004, bars either side from lifting its stake and obliges them to act as one party.
That pact may now unravel.

Certainly “Nestlé’s stake… looks ready for a makeover,” says Carol Ryan in Breakingviews. Nestlé CEO Ulf Mark Schneider is under pressure from activist investor Dan Loeb, who wants the company to offload its L’Oreal shares. Schneider told investors this week that he has no plans to do that, yet Loeb may be right. The Swiss group has made a stellar return on its investment since the 1970s, but it’s time to ditch it. L’Oréal provides a measly yield “and is a poor fit” with Nestlé’s new emphasis on consumer healthcare.

Another option is for Nestlé to buy all of L’Oréal, but that would be “a huge and risky deal”, say Andrea Felsted and Chris Hughes on Bloomberg Gadfly. It would “bolster Nestlé’s skincare assets but do less for its primary business of food and nutrition”. Buying the remaining 77% would also cost a whopping €770m or so – if Bettencourt’s daughter, Françoise, wants to sell. And there’s a risk that “Nestlé would be buying just as the cosmetics boom is at its peak”.

All this speculation presumes that “there is a need to do something”, says Lex in the Financial Times. But “there is none”. Until Nestlé can find something to buy, €422m of annual dividend income from L’Oréal is more useful than €23bn of cash earning tiny returns. The Bettencourts have shown no interest in raising their stake, and neither company is struggling financially. “Overcapitalisation is preferable to value-destroying deals or buybacks that give investors a bigger piece of a smaller pie.” 

City talk

• Multinational IT group Micro Focus “has been a brilliant investment”, says Jim Armitage in the Evening Standard. Had you jumped in when executive chairman Kevin Loosemore took over in 2011, you’d have enjoyed returns of 40% a year. Nonetheless, the bonus he has lined up is “outlandish”. If he gets the shares up to 3,600p by late 2019, he’ll rake in £27m. With the price already at 2,424p, “that’s not unlikely”. This comes on top of his everyday annual package, which last year gave him £4.2m. Loosemore “would work just as hard, for a tenth of that sum”.

• New management, new board, new vision. But the outlook for Blur Group, an online exchange matching companies with professional services, “is still, well, blurred”, says Kate Burgess in the Financial Times. Earlier this summer the group’s days looked numbered. It lost its entire board within weeks of admitting it might run out of cash. David Rowe, new chairman and venture capitalist, has raised £2.7m since the summer and the firm has slashed costs by two-thirds. Blur must now “prove itself”, he says. “Too right.”

• Compass Group’s success has been under-reported, according to CEO Richard Cousins. That’s “probably fair”, says Nils Pratley in The Guardian. As Cousins announces his resignation after 11 years at the contract caterer, the share price has risen nearly sevenfold and shareholders have seen a total return of 833%. This is a far cry from 2006, when Compass paid £40m to settle two lawsuits brought against it for allegedly bribing a United Nations official. It has kept its nose clean since then and risen to global leadership without bold acquisitions. But if the wider world was slow to notice this success, “Compass’s board definitely was not”. Cousins has been paid £43m over the past years. “He can’t grumble on that score.”

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