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Nestle plans $10bn skincare sale to EQT, Abu Dhabi

The deal is valued at 10.2bn Swiss francs and would be among the biggest private-equity deals this year.

Nestle has entered exclusive talks to sell its skincare business to a group led by EQT Partners for 10.2 billion Swiss francs ($10.1 billion) in what would be one of the biggest private-equity deals this year.

The discussions with the consortium, which is co-led by the Abu Dhabi Investment Authority, are moving ahead as the world’s largest food company wraps up a hotly contested sale process for its Cetaphil moisturisers and Proactiv acne treatments. The unit had 2018 revenue of 2.8 billion francs.

In Nestle’s biggest divestment in more than a decade, Chief Executive Officer Mark Schneider is dismantling a business that his predecessor, Chairman Paul Bulcke, touted as a promising new avenue just years ago. Schneider has instead been focusing on products such as coffee, water and pet food as Nestle works to spur sales and revamp growth. The agreed deal is the second major transaction for EQT, the Nordic region’s biggest private equity firm, this month.

The skincare unit had been a weak spot, with activist investor Dan Loeb at hedge fund Third Point saying that Nestle’s foray into the business was unrelated to its core portfolio and should be unwound. After an efficiency drive at the unit, which shed a fifth of its employees, at least a dozen potential bidders showed interest in the auction, according to people familiar with the matter. While sales have kept growing, Nestle had made it clear the business didn’t fit in Schneider’s strategy.

EQT is exploring an initial public offering, having raised more than 60 billion euros ($67 billion) since it was started about 25 years ago. Investor AB, founded by the wealthy Wallenberg family, is the firm’s anchor investor with an ownership of about 10% in its most recent funds, according to the company’s website. Last week EQT and Digital Colony Partners agreed to buy fibre-network owner Zayo Group for $8 billion.

The deal values the business at 3.6 times sales, which is higher than the average of 3.4 times for the sector, according to investment bank Bryan Garnier. MainFirst also said the price exceeded expectations.

For the Abu Dhabi Investment Authority, one of the world’s largest sovereign wealth funds, the investment will be its biggest ever private-equity deal and is a sign of sovereign and pension investors allocating more money on direct investments. The wealth fund teamed up with Triton to acquire IFCO, a maker of reusable food packaging, in February.

Cash injection

The deal would be the biggest in Europe so far this year. The cash injection could make Nestle well-placed for further acquisitions, though large ones would probably face antitrust issues given the Swiss company’s market position in food and beverages. Nestle’s cash pile may get even larger as it expects to sell its Herta lunch-meat business by mid-year and has put medical unit Prometheus Laboratories on review.

“I wouldn’t be surprised to see bolt-on deals in areas it has highlighted for attention, namely coffee, water, pet care, nutrition and consumer health,” wrote Jon Cox, an analyst at Kepler Cheuvreux.

The proceeds could fund another share buyback once the current program expires, Cox said. Nestle said earlier this year that it’s accelerating a program to buy back 20 billion francs worth of shares to complete it six months early.

Schneider had told reporters at the time that the company isn’t excluding further deals. However, Chief Financial Officer Francois-Xavier Roger has repeatedly said it’s a seller’s market.

Nestle said the deal is subject to employee consultations and is expected to close in the second half, at which time the food company will give details on what it plans to do with the proceeds. The buyers would pay cash and the transaction would be debt-free. Nestle shares, which have gained 22% this year to record levels, were little changed in morning trading.

Bidder interest

The skincare unit also attracted a range of bidders including KKR & Co., according to people familiar with the sale process. Some like Colgate-Palmolive Co. and Unilever NV eyed the consumer arm, while others like PAI Partners and Baring Private Equity sought the medical treatments business known as Galderma. A group that included Advent International, Cinven and Singapore’s GIC was also interested, people familiar with the matter said previously.

The skincare business was built out of a joint venture that Nestle formed with L’Oreal SA 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 acquire a portfolio of skin-care drugs from Valeant Pharmaceuticals.

Another piece of Bulcke’s legacy was undone with last week’s announcement that Nestle would halt direct-store delivery of frozen pizza and ice cream in the US, which it had started after acquiring DiGiorno and other brands from Kraft in 2010.

© 2019 Bloomberg L.P

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