New salvo from activist investor turns up heat on Nestle

The Nestle logo is pictured on the company headquarters building in Vevey, Switzerland. (Reuters pic)

LONDON: Nestle faces greater pressure to speed up change after activist investor Third Point stepped up its criticism of the world’s largest food company.

The New York-based hedge fund sent a letter to Nestle’s board and published a presentation online on Sunday calling for more urgent action and recommending steps it says could result in Nestle doubling its earnings per share by 2022.

The letter and presentation, published on a new Third Point website, came a year after the firm, run by billionaire investor Daniel Loeb, took a roughly US$3 billion stake in the maker of KitKat bars and Perrier water.

Nestle responded on Monday afternoon, saying it was implementing an “accelerated long-term value creation strategy” and was delivering results.

The Swiss company also declined to comment on a newspaper report that it was in talks to buy control of pet food maker Champion Petfoods for US$2 billion.

The back-and-forth had little immediate impact on Nestle shares, which were up 0.2% at 1250 GMT, outperforming the broader European stock market, which was down 0.7%.

Analysts said they shared many of Loeb’s concerns about Nestle and agreed with some of his prescriptions.

His ideas include Nestle selling its 23% stake in L’Oreal and using the proceeds for M&A or share buybacks; reorganizing into three internal units; and divesting businesses that make up to 15% of sales.

They questioned, however, whether the New York investor’s confrontational style would win points with one of Europe’s biggest companies, with a reputation for conservatism.

“While we think that in aggregate Third Point’s proposals make sense, and are probably helpful from a share price perspective, we’re not convinced that much is going to change as a result,” said analysts at RBC Capital Markets, citing what they called “practical obstacles”.

They cited the fact Nestle has a relatively new CEO, Mark Schneider, and his need to keep its workforce motivated; Third Point’s modest stake of only 1.3%; and Nestle’s long-term approach to business.

Value investors

Thomson Reuters data show that just over 11% of Nestle shares are owned by “value” investors, who typically target companies they perceive to be unfairly undervalued by the broader market. They often work behind closed doors with a readiness to hold their positions for a long time.

Third Point said Nestle should be able to reach a 20 percent profit margin by 2022, up from 16.5% in 2017.

Nestle announced a margin target last year of 17.5 to 18.5% by 2020 after Loeb’s first letter.

Loeb said Nestle should be able to double its earnings to 7 Swiss francs per share by 2022, up from 3.55 francs in 2017.

“We share much of the analysis but question whether the confrontational style is likely to secure the change that Third Point is seeking,” wrote Jefferies analysts in a note.

They pointed out that since Schneider took the corner office 18 months ago, after joining from German healthcare company Fresenius, Nestle has taken steps which are radical for the company.

Besides recruiting its first external CEO in nearly a century, Nestle set its first margin target; set a goal to buy and divest brands accounting for as much as 10 percent of sales; signaled possible flexibility on the L’Oreal stake by not renewing a shareholders agreement; and brought on new board members with relevant external expertise.

Loeb argues Nestle should divest as much as 15% of sales either through sales, spin-offs or other methods to help align its business with higher-growth categories.

Nestle has recently sold its struggling US confectionery business to Italy’s Ferrero and agreed to take control of selling Starbucks packaged coffees around the world.

It has also invested in small, faster-growing brands including Freshly, Sweet Earth, Blue Bottle Coffee and Chameleon Cold-Brew.

Still, the company’s shares are down 6% from the day before Loeb revealed his stake in June 2017, as food companies continue to struggle against increased competition from start-up brands seen as healthier or more authentic.