Swiss food group Nestle (NESN.VX) is selling an 8 percent stake in L'Oreal (OREP.PA) to the French cosmetics firm for 6.5 billion euros ($9 billion), loosening their 40-year partnership and allowing both firms to boost earnings per share.
However, Nestle said on Tuesday it remained committed to the maker of Garnier shampoo and Lancome creams for the "long haul", dampening speculation it might sell its remaining 23 percent stake anytime soon.
"This transaction is a bit of a let down," Liberum Capital analysts said in a note, referring to media reports that L'Oreal might buy a larger proportion or even all of Nestle's stake.
At 6.40 a.m. ET L'Oreal shares, which had leapt on Monday on speculation of a larger stake purchase, were down 3 percent at 125.1 euros. Shares in Nestle, home to Gerber babyfood and Kit Kat chocolate bars, were down 0.8 percent at 67 Swiss francs.
Nestle Chairman Peter Brabeck told reporters the Swiss firm planned to stay a major investor in L'Oreal, which on Monday posted forecast-beating quarterly sales.
"I do not see this as a first step of leaving L'Oreal ... not at all," he said. "We are in here for the long haul".
The Swiss firm has been a major shareholder in L'Oreal since 1974, when L'Oreal heiress Liliane Bettencourt, now the world's richest woman, sold around half her stake to Nestle for fear L'Oreal would be nationalised if Socialists came to power.
Under their pact, Nestle and Bettencourt promised not to sell their stakes without first offering them to the other.
With that agreement due to expire on April 29, 2014, speculation had been mounting the two firms would strike a deal before Nestle became free to sell its stake elsewhere.
L'Oreal said it would cancel all the shares it buys from Nestle, boosting its earnings per share by more than 5 percent.
But it will have to wait to buy more shares - if it is offered the opportunity - as French rules mean it cannot cancel more than 10 percent of its shares over an 18 month period.
"We'll leave it at that for now," L'Oreal Chief Executive Jean-Paul Agon told reporters.
Nestle said it would use cash proceeds from the deal to buy back its shares, without disclosing details. But some analysts were disappointed it had not sold a bigger stake.
"This is not the mega-buyback that some speculated," Kepler analysts said in a research note.
SKINCARE DEAL
L'Oreal will pay for the deal with 3.4 billion euros in cash and by selling to Nestle its 50 percent stake in their Galderma dermatology venture for 3.1 billion euros, including about 500 million of debt, which Nestle will pay for in L'Oreal shares.
Nestle said it would create a new subsidiary called Nestle Skin Health, which will include Galderma as well as its existing infant skin care business, Bübchen.
The Swiss group is in the midst of a drive to sell underperforming businesses and focus on what it views as high growth areas such as nutrition, health and wellness.
Bernstein analyst Andrew Wood said the Galderma deal fitted well into Nestle's strategy and would allow L'Oreal to focus on its beauty businesses.
SANOFI
The stake sale will cut Nestle's holding in L'Oreal to 23.29 percent from 29.4 percent, while the Bettencourt Meyers family's stake in L'Oreal will rise from 30.6 percent to 33.31 percent. The deal is expected to close in the first half of this year.
L'Oreal's Agon explained how the two European consumer goods groups agreed on the 8 percent figure: "Nestle's stake reduction had to allow it to remain a strategic shareholder ... while making sure that the Bettencourt family stayed below the 33.33 percent level." Beyond that level, the family would have to make an offer for the rest of L'Oreal's share capital.
The price per L'Oreal share used for the transaction is 124.48 euros, corresponding to its average closing price between November 11, 2013 and February 10, 2014.
L'Oreal said the deal would not involve selling its 9 percent stake in drugmaker Sanofi (SASY.PA), worth $12 billion. Sanofi shares fell. Analysts believe Sanofi could have boosted earnings per share by buying L'Oreal's stake. ID:L5N0LG1ZM
Reflecting the change in shareholding, the number of Nestle representatives on L'Oreal's board of directors will be cut from three to two.
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