Coverage: Activist investor Loeb takes aim at Nestle

Billionaire activist investor Daniel Loeb’s hedge fund Third Point paid $3.5 billion for a 1.3 percent stake in Nestlé and said the world’s largest food manufacturer is “stuck in its old ways” and called for changes to boost earnings.

Roger Yu of USA Today had the news:

Nestlé has fallen behind over the past decade in an environment where growth has slowed due to changes in consumer tastes and shopping habits, as well as an influx of new competition from smaller, local brands,” he wrote in a letter to investors Sunday after his firm bought 40 million shares.

The changes at Nestle sought by Loeb include selling the company’s stake in L’Oreal, getting rid of non-growth businesses, more cost-cutting and possibly buying back shares.

“As always, we keep an open dialogue with all of our shareholders and we remain committed to executing our strategy and creating long-term shareholder value,” Nestlé, based in Switzerland, said in a statement. “Beyond that, we have no specific comment.”

Shares of Nestlé, traded on SIX Swiss Exchange, rose 4% Monday.

With new brands emerging and more consumers seeking fresh foods, sales and profit margins of traditional food manufacturers have declined in recent years. Like its competitors, Nestle sought to shed some processed food business lines, such as candy, chocolate bars and TV dinners, and grow in health and medical foods.

Crystal Kim of Barron’s reported that investors shouldn’t get too excited:

Investors may be cheering Loeb’s move to unlock value in the company, but Jefferies analyst Martin Deboo says it’s going to be complicated. Deboo advises caution, because Third Point’s targets may be difficult to achieve, their influence is relatively limited, and valuations are already pricing in “a healthy degree of change.” Deboo explained in a report published this morning:

The numbers stack up…. Third Point scope 2020 EPS under their plan of between CHF 5.00 & 6.00, relative to underlying EPS of CHF 3.40 [$3.50] in FY16A and a current FY20 consensus per FactSet of CHF 4.35 (which reflects a 16.9% underlying margin). Third Point’s numbers stack up for us on a purely mechanical basis. We think FY20 consensus would be in excess of CHF 6.00 were it to cumulate fully all four elements.

….but would be non-trivial to achieve. There has been much speculation about the margin opportunity at NESN ahead of an investor seminar 26 September. Schneider said in February that NESN had ‘heard the message’ on margins, but recent mood music has been more cautious, in the face of bullish broker opinion. We observe that current gross cost savings promise an incremental 800bps or so by 2020. Achieving Third Point’s target would, therefore, require a retention rate of c.50%, relative to c.15% historically. ULVR’s plan assumes a c.33% rate.

Ralph Atkins and Kara Scannell of the Financial Times pointed out that Nestle stock hit a record high:

Its shares jumped 4.2 per cent to a record high of SFr85.50 in morning trading in Zurich on Monday. The stock has risen 17 per cent so far this year.

The company announced this month that it would quit the US confectionery business and put up for possible sale brands including Butterfinger, Baby Ruth and Crunch chocolate bars which generated sales of SFr900m ($923m) last year. Analysts believe Nestlé’s revamped US frozen food business could also be put up for sale by Mr Schneider.

Nestlé has also taken a stake in Freshly, a New York-based online ready meals company, as it seeks to build expertise in distribution and shore up its position in America’s fast changing food retail market.

Those changes may not be enough for Third Point. It said Mr Schneider “will need to articulate a decisive and bold action plan that addresses the staid culture and tendency towards incrementalism that has typified the company’s prior leadership and resulted in its long-term underperformance”.