Dean Best

Editor's viewpoint: Nestle's L'Oreal decision is worth it

By Dean Best | 11 February 2014

The food giants establishment of Nestle Skin Health fits strategy of broader moves into pharma and health

The food giant's establishment of Nestle Skin Health fits strategy of broader moves into pharma and health

After a period of flagging sales, Nestle investors may have been hoping the food giant would offload its stake in L'Oreal to fund a programme of share buybacks. In fact, the company has decided to only trim its L'Oreal stake and, in the process, gain full control of a skin health venture between the two sides - a move that underlines Nestle's wise longer-term strategy to target health and wellness in its broadest sense.

Nestle today (11 February) made two notable announcements. One, on the future of its stake in cosmetics giant L’Oréal but, two, more significantly, its decision to set up a "skin health" business - a move that fits its long-term plans.

Speculation has rumbled on for months about what Nestle planned to do with its stake in L’Oréal. There had been talk among analysts Nestle could offload the entire shareholding and fund share buybacks to boost a stock price flagging after top-line growth missed market expectations.

Today, the world's largest food manufacturer said it would cut its stake in the company from 29% to 23% by selling a batch of shares back to L’Oréal. Nestle said the cash proceeds from the transaction will be used to buy back shares.

However, speaking to reporters, Nestle chairman Peter Brabeck-Lemathe said the company would remain a L’Oréal shareholder. "I do not see this as a first step of leaving L’Oréal," he said. "We are in here for the long haul."

Shares in Nestle fell this morning as investors seemed to react coolly to the company's decision.

At the time of writing, Nestle's shares are down 0.74% but have picked up since early trading. And the market is right to take a more considered view of Nestle's announcements today - for its second statement suggests the Kit Kat maker is continuing its push into other "health and wellness" sectors.

L’Oréal is paying for the chunk of Nestle shares in cash and through handing the food giant full control of Galderma, a venture between the two companies that supplies dermatological treatments. Full control of Galderama will see Nestle set up a new division - Nestle Skin Health.

Through acquisition, in recent years, Nestle has made notable moves into areas like brain health and gut health. The company believes such moves can pay dividends in a world facing growing health challenges from non-communicable diseases and, in the developed world, ageing populations. The Galderama deal takes Nestle into what it called "skin health".

Analysts saw the logic in the transaction. Kepler Cheuvreux analyst Fabienne Caron said: "On Galderma, while it is dermatologically focused, we believe it makes sense as part of Nestle’s push into healthcare, although we expect the deal to raise some eyebrows."

There was, however, agreement elsewhere in the investment community. Sanford Bernstein analyst Andrew Wood also viewed Nestle's move positively. In a note to investors, Wood explained Nestle sees the move into "skin health as a reasonable extension of its focus on health".

He added: "We have long believed that the long-term future of the food industry is in the overlap between food and pharma or between food and beauty and it could be argued that this transaction moves Nestle towards the overlap of all three. It highlights Nestle’s strong long-term focus on the strategic evolution of the business in-line with the needs and desires of consumers, and we view it positively."

Some investors may have wanted Nestle to sell off its L’Oréal shareholding and use the proceeds to buy back stock. The announcements today will see some of the cash go back to shareholders. However, the more significant move is Nestle's acquisition of the Galderama skin-health venture.

Although Nestle's moves into health and pharma are very long-term plays, and have a degree of uncertainty about them, investors should be quietly comfortable the company is looking at diversifying into areas that seem to meet long-term consumer trends.

Sectors: Health & wellness, Mergers & acquisitions

Companies: Nestle

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