Nestle May Be Swimming in Cash After CEO’s Biggest Disposal

(Bloomberg) -- Nestle SA Chief Executive Officer Mark Schneider faces a big question once he sells the company’s skincare unit for 10.2 billion Swiss francs ($10.1 billion): What to do with all the money.

The Swiss food giant said Thursday that it expects to conclude the deal, its largest divestment in more than a decade, to investors led by EQT Partners and the Abu Dhabi Investment Authority before the end of the year.

What Other Sales Are Looming?

This would be Nestle’s second-largest divestment in its 153-year history, and money is also set to flood in from other planned asset disposals. Nestle has said the sale of its lunch-meat business Herta may come by midyear, and it’s reviewing its medical unit Prometheus Laboratories Inc., which analysts estimate is worth just short of 1 billion francs. Analysts are further speculating on potential divestments of ice cream, frozen-food labels such as Stouffer’s and the Thomy condiment brand.

What Will Nestle Do With All That Money?

The Nescafe maker will be loaded with cash to do something, including acquisitions, another share buyback or debt reduction. While Schneider has said he doesn’t exclude big acquisitions, most analysts think for now Nestle will focus on its $7.2 billion purchase of the rights to sell coffee products under the Starbucks brand. The company is staying mum until completion of the skincare deal, promising to give further details at a later date. Most analysts are betting Nestle will announce another buyback, as the current 20 billion-franc program is set to be completed soon.

What About Acquisitions?

While Schneider says he doesn’t exclude a major purchase, Chief Financial Officer Francois-Xavier Roger has repeatedly said it’s a seller’s market. The company says it prioritizes organic growth and dividends when it decides how to use excess cash. A major obstacle to big acquisitions is that Nestle already has a dominant position in many of its food and beverage markets, raising antitrust concerns. Jon Cox, an analyst at Kepler Cheuvreux, said he wouldn’t be surprised to see bolt-on deals in areas management has highlighted for attention: coffee, water, pet care, nutrition and consumer health.

Why Did Nestle Have a Skincare Business?

That’s a question Dan Loeb asked when the activist shareholder started prodding Nestle to jump-start growth. The unit was built out of a joint venture formed with L’Oreal SA in 1981. Schneider’s predecessor Paul Bulcke agreed to pay the cosmetics giant more than $3 billion to buy the business out in 2014 and then shelled out a further $1.4 billion to acquire a portfolio of skincare drugs from Valeant Pharmaceuticals Ltd. On his third year in the job, Schneider is dismantling the business, giving up brands such as Cetaphil and Proactiv, showing he’s not afraid to slay sacred cows.

What Are the Implications for Nestle’s L’Oreal Stake?

There’s no major change, but the influx of cash may relieve pressure from investors to reduce the 23% holding. The one thing that could change that is if Nestle executives dropped their reluctance to pursue a major acquisition. Then the company could tap the stake, worth more than 30 billion euros ($34 billion). Analysts think such a purchase would be most likely in pet care, which has seen massive price tags, or new areas.

--With assistance from Lisa Pham.

To contact the reporter on this story: Corinne Gretler in Zurich at cgretler1@bloomberg.net

To contact the editors responsible for this story: Eric Pfanner at epfanner1@bloomberg.net, Thomas Mulier

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