L’Oreal is to buyback a stake of 8.0 percent from Nestle which currently owns 29.4 percent.
The biggest L’Oreal shareholder is the daughter of the founder, 91-year-old Liliane Bettencourt. The family holds 30.6 percent.
There were deep concerns in French government circles that the Bettencourt family could pass control to the Swiss group.
The deal between these two titans in their industries is worth 6.5 billion euros ($8.9 billion) and answers some burning questions about the strategies of the two groups.
L’Oreal will finance half of the cost by selling its share in a joint venture, the firms announced on Tuesday.
The two companies have been linked for 40 years, but a deadline for a decision on the strategic tie-up was due to fall in April.
Nestle had undertaken not to increase its stake while Bettencourt was still alive.
Nestle is cash rich and had no pressing need for the money it will receive for reducing its stake.
But until now it had never revealed its hand over its strategic options, ranging from a complete withdrawal to a takeover.
When completed, the buyback of an 8.0 percent stake in L’Oreal will leave Nestle with 23.29 percent, but the stake owned by the founding Bettencourt family will rise from 30.6 percent to 33.1 percent.
The bought-back shares will be cancelled, automatically boosting earnings per share by 5.0 percent.
To finance the operation, L’Oreal will sell its half of a skin care venture with Nestle called Galderma, on a valuation basis of 3.1 billion euros and will pay an extra cash amount of 3.4 billion euros.
The deal is based on a share price for L’Oreal corresponding to the average closing value between November 11 and February 10, or 124.48 euros.
The two groups said that their boards had agreed the terms unanimously on Monday.
The number of seats on the L’Oreal board held by Nestle will fall from three to two.
The companies hope to tie up the deal by the middle of this year.
Nestle said that its remaining stake was a long-term strategic commitment and did not signal a total withdrawal from L’Oreal, but analysts held that the sale did suggest that Nestle might pull out eventually.
The price of shares in L’Oreal surged by more than 4.0 percent initially because of the boost to earnings per share, but then showed a fall of 2.05 percent to 126.35 euros
This was because the remarks by Nestle were interpreted as meaning that “this sale was a precursor of others,” commented a trader at Oddo Securities, Nathalie de Medina.