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Nestlé Is Ripe for Activists Looking for Next Mondelez

Published on Aug 10 2015 8:24 AM in A-Brands tagged: Featured Post / Nestlé / Mondelez

Nestlé Is Ripe for Activists Looking for Next Mondelez

Nestlé SA could be the next food company to draw interest from an activist investor after Bill Ackman targeted Mondelez International Inc.

Food and beverage companies have been popular targets for activist shareholders because of their bloated expenses and lackluster growth. Just this week, Ackman disclosed a stake in Mondelez, spurring speculation that he would seek cost cuts and potentially a sale. ConAgra Foods Inc. and Boulder Brands Inc. have also recently faced calls for shakeups.

So far, activist investors have mainly targeted U.S. food companies, but Nestlé’s underperformance could draw them to Europe. The $240 billion Swiss maker of Lean Cuisine frozen meals and KitKat bars will probably miss its long-term average sales growth target for the third time. Little changed in early Zurich trading, its stock has gained less than 1 percent this year, trailing the more than 16 percent gain in the Stoxx Europe 600 Index.

Nestlé reports first-half results on Thursday.

“What an activist could finally do is look into all of the issues which are currently prevailing,” Alain-Sebastian Oberhuber, a Zurich-based analyst at MainFirst Bank AG. “It seems at the moment that they have red flags in several places.”

Nestlé is grappling with waning demand for its biscuits and peanut-milk beverages in China and a recall in India of its popular Maggi instant noodles. Its stagnant frozen-food business isn’t helping things. Shedding that division, along with the company’s 23.2 percent stake in cosmetics maker L’Oreal SA, would allow management to focus on the emerging-market challenges and its faster-growing brands.

Share Buyback

Nestlé could add 21 billion euros ($23 billion) of cash flow through 2018 by gradually reducing its stake in L’Oreal, said Jeff Stent, an analyst at Exane BNP Paribas. The company could use that money to boost its share buyback or to make acquisitions. Nestlé already sold 8 percent of its L’Oreal holding in 2014 in what many analysts speculated was just the first step.

Another division that an activist investor could push Nestlé to sell is its skin-health business. Nestlé acquired full control of the Galderma wrinkle treatment and acne medication business from joint-venture partner L’Oreal just last year, but skincare doesn’t have a lot to do with food and beverages. Nestlé in 2010 sold its stake in eye-care company Alcon Inc. to Novartis AG for $28.3 billion.

Little Defense

“Then a couple of years later, they go into more or less pharma again -- which is difficult to understand,” Oberhuber of MainFirst said. “When I talk to investors, a lot of them have question marks regarding Galderma.”

Nestlé’s European domicile and large market value may prove little defense against an activist investor.

Bloomberg News, edited by ESM. To subscribe to ESM: The European Supermarket Magazine, click here.

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