By Saabira Chaudhuri
Billionaire activist investor Daniel Loeb's Third Point LLC
hedge fund has taken its largest-ever initial bet on a public
company, with a $3.5 billion stake in Nestlé SA, piling pressure on
the world's largest packaged-foods company to find ways to
accelerate growth.
The stake amounts to about 1.25% of Nestlé's shares. That's a
small investment for the European giant. But it's an unusually big
bet for a U.S. activist fund in Europe, where American investors'
sometimes aggressive approach has had mixed success.
Nestlé didn't respond to requests for comment.
Third Point outlined an array of changes it believes the
consumer-goods giant could make, including improving margins,
innovating in its core business and selling noncore assets and its
23% stake in French cosmetics company L'Oréal SA.
"It is rare to find a business of Nestlé's quality with so many
avenues for improvement," Third Point said in a letter to investors
on Sunday night.
"Despite having arguably the best positioned portfolio in the
consumer packaged goods industry, Nestlé shares have significantly
underperformed most of their U.S. and European consumer staples
peers on a three year, five year, and ten year total shareholder
return basis," it said.
Third Point said Nestlé has "fallen behind over the past
decade," and that while competitors have adapted to changes in how
people shop and to more competition from small, local brands,
"Nestlé has remained stuck in its old ways."
The stake is Third Point's largest initial bet in its more than
20-year history and ranks among the largest in activism history as
well.
Mr. Loeb played a big role in shaking up Yahoo Inc. as an
activist shareholder and board member some years ago. He is also
known for fiery-worded letters to executives and fights at
companies like Sotheby's, though in recent years he has tamed his
public image and looked to work more quietly with companies. A
recent call to split up conglomerate Honeywell International Inc.,
for instance, found a somewhat open ear at the company, which has
said it is already entertaining his idea even if it hasn't
committed to a plan.
Mr. Loeb has been among the few U.S.-based activists to venture
abroad for some of his biggest investments, where rules of the game
are different and there's less of a track record of shareholder
support for more aggressive campaigns. Activist investor Elliott
Management Corp., for instance, was unsuccessful in its recent
efforts to coerce Akzo Nobel NV, in which it has shares, into
unwanted sale talks with PPG Industries Inc.
Nestlé in February said it was dropping a long-running
sales-growth target after missing that goal for the fourth straight
year. The company's new chief executive, Mark Schneider, a
health-care veteran, recently said Nestlé would look to sell its
U.S. confectionery business, which lags behind rivals Hershey Co.,
Mars Inc. and Chocoladefabriken Lindt & Spruengli AG.
Nestlé has also faced calls to consider selling its frozen-food
arm, which includes brands like Lean Cuisine and Stouffer's,
another business that has struggled as consumers increasingly look
to fresh options.
Mr. Schneider has been working to better understand changing
consumer behavior and raise Nestlé's exposure to higher-growth
channels. Last week the company disclosed a stake in
subscription-meals delivery firm Freshly -- which sells healthy,
prepared meals to U.S. consumers -- saying it would benefit from
its analytics and distribution.
Third Point said Nestlé's stagnant per-share earnings over the
past five years have translated to slowing dividend growth.
"Without addressing the company's stalled earnings, further
dividend increases will be unsustainable at historical rates," said
the firm. "While Nestlé has stood still, its peers have pursued
productivity increases aggressively and made other changes in order
to deliver earnings growth and create shareholder value in a slower
sales growth world."
Nestlé isn't the only consumer-goods company to struggle with
slowing growth. Rivals including Unilever PLC, Danone SA and
Reckitt Benckiser Group PLC have all grappled with weaker global
growth -- particularly in emerging markets -- volatile currencies,
changing consumer tastes and a difficulty raising prices in an
environment of low inflation or even falling prices, known as
deflation.
Other consumer-goods companies like Unilever, Diageo PLC and
Kraft Heinz Co. have taken a hard line on cost by adopting
so-called zero based budgeting, whereby expenses have to be
justified from scratch every year. But Nestlé has criticized the
cost-cutting approach pioneered by Brazilian investment firm 3G
Capital Partners LP, with Mr. Schneider on Thursday saying at a
conference "we don't believe in that model." The company follows
its own cost-cutting program, while simultaneously investing in
what it says are high-growth areas of its business such as petfood
and coffee.
Mr. Loeb said he thinks Nestlé can improve its margins by as
much as four percentage points over the next several years and that
the company should adopt a formal margin target of 18%-20% by 2020.
He added that the company should take on more debt to fund share
buybacks and sell its stake in L'Oréal, which currently makes up
10% of Nestlé's market capitalization with a value of over $25
billion, allowing shareholders to choose whether they want to
invest just in Nestlé or also in L'Oréal.
Mr. Loeb drew comparisons with Third Point's 2015 investment in
Baxter International Inc., which led the Deerfield, Ill.-based
hospital-products maker to give his firm a seat on the board and a
role in the hunt for the company's next chief executive.
He described Nestlé's condition as similar to Baxter's saying
investors there had underestimated the potential possibilities with
a new CEO focused on things like better capital allocation,
portfolio optimization and margin improvement.
While Mr. Loeb has taken a forceful approach with other
companies, he indicated he will be collaborative with Nestlé,
saying he "intends to play a constructive role to encourage
management to pursue change with a greater sense of urgency."
He praised Mr. Schneider, who earned a reputation while CEO of
German medical supply company Fresenius SE, for driving strong
growth. But he said Mr. Schneider would have to address what he
called the "staid culture and tendency towards incrementalism that
has typified the company's prior leadership and resulted in its
long-term underperformance."
Nestlé's shares have climbed recently as investors have high
hopes for Mr. Schneider. Fresenius shares rose 1,246% during his
CEO tenure. He is credited with boosting revenue at the German firm
through geographic expansion and a number of big acquisitions.
Third Point has hired Jan Bennink, the former CEO of Royal
Numico NV, to help formulate its plan for Nestlé, saying Mr.
Bennink's move to cut costs and sell noncore assets while at the
baby-food company had dramatically increased sales and expanded
margins before it was sold to Danone. Mr. Bennink also previously
worked as the executive chairman of Sara Lee Corp., overseeing its
split into two companies.
--David Benoit in New York contributed to this article.
Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com
(END) Dow Jones Newswires
June 25, 2017 20:27 ET (00:27 GMT)
Copyright (c) 2017 Dow Jones & Company, Inc.
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