Nestle's Step Away From Skin Health Reignites L'Oreal Sale Talk

(Bloomberg) -- Nestle SA’s likely retreat from skincare fuels questions about the company’s broader involvement in cosmetics and the future of a prized asset that many investors want to see sold: a $30 billion stake in L’Oreal SA.

Nestle said Thursday it would consider new owners for its dermatological business, a unit with $2.8 billion in annual revenue that Chief Executive Officer Mark Schneider said may no longer fit with the company’s overall strategy of focusing on products such as coffee, water and pet food.

That led analysts such as Andreas von Arx at Baader Helvea to speculate that a long-awaited divestment of L’Oreal may come up for discussion. Schneider is stepping up the pace of change, having also announced a bond sale and the divestment of an insurance business in a flurry of deals this week. Breaking ties with the French cosmetics giant is one of the main remaining issues that activist investor Dan Loeb has been lobbying Nestle about.

“We see this as a symbol of willingness to slay sacred cows,” wrote Martin Deboo of Jefferies. Schneider is making a “highly symbolic break” from his predecessors.

Facing pressure from Loeb to focus on its mainstays, Nestle has bought and sold businesses at an accelerated pace in the past year. Selling the dermatological brands means dismantling a business that former CEO Paul Bulcke touted as a promising new avenue of growth.

Analysts are divided on how much Nestle could get from the skin health unit. Deboo estimates 4 billion francs ($4.1 billion), saying the few plausible options include a sale to L’Oreal or a leveraged buyout. Alain Oberhuber, an analyst at MainFirst, estimated it could fetch as much as 8 billion francs, as the business may appeal to Johnson & Johnson or Japan’s Shiseido Co.

Schneider has called Nestle’s stake in L’Oreal a “fabulous investment,” and has resisted calls to announce a divestment. The stock has gained 12 percent in the past year, outperforming Nestle’s shares.

Pimple Cures

Nestle Skin Health makes products ranging from acne treatments to injectable skin fillers that compete with Botox. The unit has been a weak spot for the company due to generic competition, and is cutting hundreds of jobs and closing sites.

Read more: Nestle Plans to Cut 400 Jobs at Galderma Skin Health Research

“One of the CEO’s top priorities at the beginning of his mandate was to stop the hemorrhaging,” Jean-Philippe Bertschy, an analyst at Bank Vontobel AG, wrote in a note. The unit had engaged in “record value destruction in the past four years,” and now Nestle is “executing like a metronome.”

Nestle shares rose as much as 0.7 percent in early trading. They’re little changed from where they were before Loeb announced his stake in June last year.

The skincare business was built out of a joint venture called Galderma that Nestle formed with L’Oreal in 1981. Nestle paid the French cosmetics maker more than $3 billion to buy the business out in 2014 and in the following months paid a further $1.4 billion to buy a portfolio of skin-care drugs from Valeant Pharmaceuticals.

This week Nestle agreed to sell Gerber Life Insurance to Western & Southern Financial Group for $1.55 billion as it considers such financial products outside its main business. The company also sold $8 billion of bonds to help fund its alliance with Starbucks Corp.

Read more: Nestle Sells $8 Billion of Bonds to Help Fund Starbucks Deal

The food company said the review should be complete by the middle of next year.

--With assistance from Albertina Torsoli and Lisa Pham.

To contact the reporters on this story: Thomas Mulier in Geneva at tmulier@bloomberg.net;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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