Nestle SA will lower its stake in L’Oreal to roughly about 20 per cent through selling shares worth 8.9 billion euros ($10 billion) back to the French cosmetics company, the company has said.

This would help Nestle to bring down the pressure of the beauty giant’s on its financial books. This is also the first time in seven years that such a strategy has been adopted by Nestle.

The Nescafe maker’s stake in the cosmetics behemoth has been heavily scrutinised over the years. In its defence, the Swiss corporation had repeatedly stressed that its stake is both financial and strategic, even when activist investor Third Point recommended a sale in mid-2017.

Value of L’Oreal shares have more than doubled since then.

Nestle approached L’Oreal two months ago, seeking to reduce the weight of its L’Oreal holding while maintaining a level above 20 per cent. According to the Swiss company, the move would allow it to consolidate the investment on accounts. The move kick-started off a flurry of negotiations which included the chairmen from both companies, according to a source with knowledge of the negotiations.

Following the transaction, Nestle said that it would control 20.1 per cent of L’Oreal, down from 23.3 per cent earlier.

Meanwhile, L’Oreal said it will buy back shares representing 4 per cent of its capital and cancel them by Aug. 29.

L’Oreal, which is paying 400 euros per share, claims the transaction would increase profits per share by more than 4 per cent over the course of the year. The cosmetics firm is paying with both cash and debt.

The Bettencourt Meyers family’s stake will increase to 34.7 per cent from 33.3 per cent as a result of the transaction, which is expected to close in the coming days, but they will not be required to launch a takeover offer, as is normally required for passing ownership thresholds above one-third of the capital.

The shares of L’Oréal rose 3.96 per cent to 424.8 euros on Tuesday, while Nestle rose 0.1 per cent to 121.9 Swiss francs.

The packaged goods company also said that its board of directors has planned to buy back 20 billion Swiss francs ($21.6 billion) in shares between 2022 and 2024, noting that the programme would be adjusted if it made significant acquisitions.

Nestle said that it will finish its current share repurchase programme by the end of the year, having purchased shares for 12.7 billion Swiss francs, or about two-thirds of the programme amount.

Around four years ago, L’Oreal signalled its willingness to purchase Nestle’s 23 per cent holding if the Swiss stakeholder decided to sell.

Nestle sold its skin health business for 10.2 billion Swiss francs in October 2019, as the company sought to shed unprofitable assets.

Nestle lowered its stake from 31% to 21% in 2014.

Centerview served as L’Oreal’s principal consultant on the deal disclosed on Tuesday.

(Adapted from EconomicTimes.com)