New York - Dan Loeb has amassed a $3.5 billion stake in Nestle SA,
targeting Europe’s largest company in the biggest bet of his two-decade career
as an activist investor.
Third Point, Loeb’s hedge fund, owns about 40 million
shares in the Vevey, Switzerland-based company, according to an investor
letter released Sunday after Bloomberg first reported the position.
The fund encouraged Nestle to sell its stake
in cosmetics maker L’Oreal SA, increase leverage for share buybacks and
adopt a formal profitability target, among other suggestions. The shares rose
as much as 4.7 percent in early Zurich trading.
“It is rare to find a business of Nestle’s quality with so
many avenues for improvement,” wrote Third Point, which holds a 1.3 percent
stake.
The Nestle position adds to a recent push into Europe for
Loeb, who’s better known for his campaigns in the US and Japan.
Read also: Nestle misses sales target for third year
Third Point, citing an improved economic outlook and
declining political risks in the region, has invested in UniCredit SpA, the
second-largest listed bank in Italy, and German utility EON SE.
Loeb’s investment in Nestle ratchets up pressure on the
European consumer-goods industry after rival Unilever rebuffed an unwanted
takeover approach from Kraft Heinz earlier this year.
The Anglo-Dutch company, while contrasting its long-term
approach with what it described as a push for short-term profits by the US
company, responded by promising to boost shareholder returns and put its
slow-moving spreads business up for sale.
Reckitt Benckiser Group has moved to sell its food
business after acquiring baby-formula maker Mead Johnson, while Danone SA is
selling the Stonyfield yogurt business after acquiring soy milk maker
WhiteWave.
The Third Point investment also puts a spotlight on Nestle
Chief Executive Officer Mark Schneider after 2016 sales growth fell to the
slowest pace in at least a decade and the stock price lagged behind other
consumer giants in recent years.
For Loeb, Nestle represents not only his single largest
investment since Third Point was founded in 1995, but also the biggest company
he’s ever targeted to improve shareholder returns. A representative for Nestle,
which had a market capitalization equivalent to $263 billion at the close of
European trading last week, was unable to immediately comment.
“We are convinced that Mark Schneider has very ambitious
plans for Nestle, including some or all of Third Point’s proposals,”
Jean-Philippe Bertschy, an analyst at Bank Vontobel AG, wrote in a note. “Third
Point’s move might be seen as hostile to Nestle, but could well be a great ally
and accelerator for Mark Schneider in his strategic plan.”
Schneider, the first Nestle outsider to run the world’s
biggest food producer in nearly a century, has already started shifting the
company’s priorities toward healthier foods and faster-growing businesses since
taking the helm on Jan 1. Nestle said this month it may sell its US chocolate
and candy unit, which includes brands such as Butterfinger and Baby Ruth.
While Third Point applauded Nestle’s plans for the
confectionery business and called Schneider a high-caliber executive with an
impressive track record, the hedge fund urged him to articulate a “bold” action
plan that addresses Nestle’s “staid culture and tendency towards
incrementalism.”
“Ultimately, they have been very slow to respond to changes
in the market,” James Santo, a senior vice president at asset manager
Northern Trust in Sydney, said by phone on Monday. “That’s clearly why
we’re seeing the pressure coming from the shareholders now.”
Nestle, which makes everything from Nespresso coffee to
Gerber baby food, should conduct a review of its more than 2 000 brands and
reduce exposure to underperformers, Third Point said. The company should adopt
a formal target of boosting its operating profit-margin to as much as 20
percent by 2020, from about 15 percent in 2016, and double its leverage ratio
to free up more cash for stock buybacks, the hedge fund said.
The time is also right for Nestle to sell its L’Oreal
position, Third Point said. Nestle owns about 23.2 percent of the cosmetics
giant, a stake valued at about $27 billion, according to data compiled by
Bloomberg.
“The L’Oreal stake could be divested via an exchange offer
for Nestle shares that would accelerate efforts to optimize its capital return
policies, immediately enhance the company’s return on equity, and meaningfully
increase its share value in the long run,” said Third Point, which retained
former Sara Lee, Executive Chairman Jan Bennink to advise on the investment.
Consumer companies have become popular targets for activist
shareholders. In 2015, billionaire hedge fund manager Bill Ackman amassed a
$5.6 billion stake in snack giant Mondelez International and called for
management to improve the company’s performance, leading to cost cuts.
Procter & Gamble attracted Nelson Peltz’s Trian Fund
Management, which revealed its position in the consumer-products maker in
February and has since amassed a stake valued at about $3.3 billion, according
to its latest regulatory filing.
Loeb is aiming high with Nestle as activist investors enjoy
a resurgence of client inflows and returns. Third Point’s flagship fund gained
almost 10 percent in the first five months of 2017, part of an industrywide
rebound that saw event-driven funds return 5.6 percent on an asset-weighted basis,
the most among the main strategies tracked by Hedge Fund ResearchStill, not everyone’s convinced Nestle needs drastic changes
to secure its future.
“Anything is possible, but I’m not am not totally convinced
that Dan Loeb has a better strategic vision for the company than its own
management,” Stephen Macklow-Smith, head of European equity strategy at
JPMorgan Asset Management in London, told Bloomberg TV. “Given its very, very
powerful portfolio, particularly in areas like Nespresso, it’s pretty well
placed for the future.”
BLOOMBERG