Sanofi Mulls Putting Cash Behind Interest In Buying L’Oreal’s Shares

Sanofi has the cash to buy back about $12 billion of its shares currently owned by beauty firm L’Oreal, if those shares were up for sale, Sanofi CEO Viehbacher says. L’Oreal CEO Agon suggested in recent earnings call that the firm could seek cash for future deals through the sale of its 9% stake in Sanofi.

Sanofi SA would consider buying back the $12 billion in shares owned by L'Oreal SA if the beauty firm were to place its stake up for sale, Sanofi CEO Chris Viehbacher says.

There have been rumors that L’Oreal is considering the move to finance a buyback of its own stock from Swiss firm Nestle SA. Under a deal made between Nestle and L'Oreal in 2004, a mutual right of first refusal between the parties will expire in April of 2014. L’Oreal currently is Sanofi’s largest stockholder with 8.88%.

During the Bank of America Global Healthcare Conference on Sept. 13, Viehbacher cautioned the investment community against speculating.

“Nestle might or might not do something, which means that L'Oreal might or might not do something,” he remarked during the. “The thing is so darn conditional [but] I would say we certainly have cash flow to do something” if that option arises.

“Whether we would intervene in that or not is going to be a function of, if it does happen, at that given point in time, what is the best use of capital?” he said. “It may well be opportune to have a look at it.”

While Paris-based Sanofi’s primary focus is on Rx drugs, since Viebacher took the helm in 2008 the firm has substantially expanded its consumer health business, including acquiring OTC drug and personal care product firm Chattem in 2009 for $1.9 billion to establish an OTC presence in the U.S.

Chattem markets brands including Gold Bond and Cortizone lotions, Selsun Blue dandruff shampoo, ACT Fluoride Rinse and Icy Hot topical analgesic (Also see "With $1.9 Bil. Bid For Chattem, Sanofi Knocks On Door To U.S. OTC Market" - HBW Insight, 4 Jan, 2010.).

Sanofi’s expansion in the consumer product space also includes the 2009 acquisitions of French health and beauty supplement firm Laboratoire Oenobiol, which makes the tan-enhancing supplement Oenobiol Solaire, Symbion Consumer's vitamin and supplement business in Australia and Zentiva's OTC and supplement business in Central and Eastern Europe; and the 2010 acquisition of Polish drug, dietary supplement and cosmetics firm Nepentes in 2010 (Also see "Sanofi Names Regenauer Global OTC Head, Underscores Consumer Focus" - Pink Sheet, 11 Jan, 2010.).

In a Sept. 16 report, Societe Generale analyst Stephen McGarry suggested that Sanofi has financial muscle to buy the stock, noting the firm's balance sheet indicates the purchase “would not be problematic.” The analyst projected a buyback would be beneficial to Sanofi’s bottom line.

“Given the recent weakness in Sanofi's share price – partly due to a weak Q2, as well as speculation on the future of the L'Oreal stake – buying the L'Oreal stake would make more sense today than at any point so far this year,” McGarry said.

Speculation over L'Oreal's potential sale of Sanofi shares followed rumors in the European press that L’Oreal plans to buy back the Nestle-owned shares. Nestle currently holds a 29.5% stake in L'Oreal, valued at $29.9 billion.

Nestle bought its stake in L'Oreal in 1974, when Liliane Bettencourt, daughter of L’Oreal’s founder and majority shareholder, sold nearly half of her L’Oreal holdings for a 3% share in Nestle.

L'Oreal CEO Jean-Paul Agon did not deny the firm’s interest during an Aug. 30 earnings call, but suggested recent reports were “business fiction.”

“I didn't at all state in ... interviews that we'd be ready, [or that it would be] desirous to buy back, to buy their stake,” he told analysts.

Of the shares in question, which represent 29.5% of L'Oreal's business (valued at about $31 billion, or €23 billion), Agon said: “We have considerable financial wherewithal because we have positive cash, and 9% of Sanofi.”