Commentary

Loeb Pumps $3.5 Billion Into Nestle; Suggests Dramatic Changes

Nestlé’s market value has been surging on the news that the activist hedge fund led by Daniel Loeb has bought about 40 million shares — a $3.5 billion stake — of the Vevy, Switzerland-based food conglomerate’s stock. 

In a letter to his investors in Third Point LLC over the weekend, Loeb begins by pointing out that Nestlé, “with an over $250 billion market capitalization, is the largest food business in the world and home to some of the world’s greatest brands” but he also sees “many avenues for improvement.” 

Loeb observes that “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. One-year returns have been driven largely by the market’s anticipation that with a newly appointed CEO, Nestlé will improve.” 

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Shares rose 3.7% in the opening 30 minutes of trading in Zurich Monday morning “extending their year-to-date gain under new CEO Ulf Mark Schneider to 16.6%,” reports Lisa Botter for The Street. 

Schneider became CEO of Nestle last June 13 after years of leading the Germany-based, €28-billion global healthcare company Fresenius. A couple of weeks ago, the company said it was exploring its “strategic options” for its U.S. confectionary business — brands such as Butterfinger, BabyRuth, SweeTarts, LaffyTaffy, and Nerds— and expected to reach a decision on their fate by the end of the year.

Apparently, that’s just the beginning of what could be done, according to Loeb. 

“‘Nestlé has remained stuck in its old ways,’ the hedgie said while acknowledging that shoppers are increasingly purchasing smaller, local brands,” writes Carleton English for the New York Post. “Loeb, blasting Nestle’s ‘staid’ corporate culture for being prone to ‘incrementalism’ rather than the quick, dramatic changes the company needs, wrote that Nestle could benefit from share repurchases, re-evaluate its portfolio of brands and sell its 29% stake in L’Oreal,” English continues.

“Nestlé’s businesses model has traditionally focused on leveraging its sales growth, and its size acts as a defense against possible takeover attempts. Organic growth has slowed in recent years as a result of changing consumer trends and a sluggish global economy, and Kraft Heinz’s actions have fueled speculation that Nestlé would not be immune to upheaval in the global food industry,” write Ralph Atkins and Kara Scannell for Financial Times

Reuters’ “Breakingviews” columnist Jeffrey Goldfarb says that the “pushy billionaire” hedge-fund boss has a steep Alpine mountain to climb in setting his sites on the “sprawling conglomerate” that is Nestlé. Such enterprises “can be hard to push around” as a rule, but “Loeb is obviously undaunted” and he has some experience overcoming similar obstacles.

“He dared into the entrenched boardrooms of corporate Japan, on the back of initiatives spearheaded by Prime Minister Shinzo Abe. The Third Point boss scored some wins, including wringing higher payouts out of robot-maker Fanuc. Despite walking off with a profit from an investment at Sony, however, the Japanese electronics heavyweight rejected his demands to spin off its entertainment business,” Goldfarb writes.

Europe, in fact, is a new destination for Loeb’s wanderlust — and his interest is indicative of a larger trend. 

“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 Co. 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 U.S. company, responded by promising to boost shareholder returns and put its slow-moving spreads business up for sale,” Bloomberg’s Ed Hammond and Beth Jinks report.

“Reckitt Benckiser Group Plc 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,’ they continue. 

Meanwhile, the New York Times’ Amie Tsang bulletpoints some  “other notable activist campaigns of late, as investors flush with cash seek to shake up corporate titans for profit.” 

Tsang includes Jana Partners, “which reaped a quick profit when the grocer agreed to sell itself to Amazon,” Trian, which has stakes in Procter & Gamble and General Electric, and Land and Buildings, which wants Saks to “consider selling its real estate.”

It’s a bottom-line game out there and all the brands are merely players.

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