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Nestlé Targeted By Hedge Fund’s Biggest-Ever Bet

Published on Jun 26 2017 8:32 AM in A-Brands tagged: Featured Post / Nestlé / Dan Loeb / Investor

Nestlé Targeted By Hedge Fund’s Biggest-Ever Bet

Activist investor 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.

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.

“It is rare to find a business of Nestle’s quality with so many avenues for improvement,” wrote Third Point, whose stake includes options and is held in part through a special purpose vehicle.

The investment ratchets up pressure 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.

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 U.S. chocolate and candy unit, which includes brands such as Butterfinger and Baby Ruth.

Action Plan

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 Corp. 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.

Activist Revival

“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 Corp. 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 Inc. and called for management to improve the company’s performance, leading to cost cuts. Procter & Gamble Co. attracted Nelson Peltz’s Trian Fund Management LP, 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 Research Inc.

European Move

The Nestle position adds to a recent push into Europe for Loeb, who’s better known for his campaigns in the U.S. and Japan. Third Point said in April it had invested in UniCredit SpA, the second-largest listed bank in Italy, because of its low valuation, recent recapitalization and new CEO. The hedge fund also took a stake in German utility EON SE, arguing that the business was “misunderstood by the market and attractively priced.”

“We are seeing more opportunities in Europe because of strong and improving economic data,” Third Point wrote in an April 27 letter to investors.

While Nestle shares have outperformed the Stoxx Europe 600 Index with an 18 percent gain over the past three years, they’ve trailed other European consumer heavyweights. Unilever NV, which rebuffed a $143 billion takeover proposal from Kraft Heinz Co. earlier this year, has rallied 53 percent in Amsterdam trading, while Reckitt Benckiser Group Plc has advanced 54 percent in London. Danone, the world’s biggest yogurt maker, has gained 26 percent in Paris.

“Third Point intends to play a constructive role to encourage management to pursue change with a greater sense of urgency,” the firm wrote of Nestle in Sunday’s letter. “We have offered our views in productive conversations with management, which we expect will continue.”

News by Bloomberg, edited by ESM. Click subscribe to sign up to ESM: The European Supermarket Magazine.

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