Nestle plan hailed as only
the start of Schneider's shake-up
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[June 29, 2017]
By Silke Koltrowitz and Maiya Keidan
ZURICH/LONDON (Reuters) - Nestle's plan to
shore up its capital structure, announced only days after being thrust
into the spotlight by activist shareholder Third Point, was received by
investors as a precursor to bigger changes under the company's new
Shares in the world's largest foodmaker rose as much as 2 percent on
Wednesday, close to the record high touched on Monday after the New
York-based hedge fund disclosed a $3.5 billion stake and urged Nestle to
buy back shares, set a target for margin growth and shed non-core assets
including its stake in L'Oreal <OREP.PA>.
Investors did not have to wait long for a response, with Nestle
announcing late on Tuesday that it would launch a 20 billion Swiss franc
($20.8 billion) share buyback program while leaving room for near-term
Nestle also said it would continue adjusting its portfolio and assess
opportunities to boost profit margins, stopping short of setting a firm
target. It added that the measures were the result of a review
instigated at the start of the year after Mark Schneider took over as
The moves were welcomed by stakeholders large and small.
"This is a new era for Nestle and I'm extremely positive on the
prospects for internal and external growth," said Carine Menache, who
runs a Monaco investment firm that owns Nestle shares. She and UBS
analysts said the buyback should lift earnings by 6 percent, while
increased merger and acquisition (M&A) activity could provide a further
"Nestle may have a poor track record for M&A, but the new CEO,
Schneider, is now in charge and he has a great track record," she added.
Reaching a 19 percent operating margin, the midpoint of Third Point's
recommendation, would lift earnings by another 8 percent, according to
UBS, which said Nestle shares now offered the greatest opportunity for
growth of all the European packaged goods companies it covers,
bolstering its "buy" rating.
Of Nestle's plan, which they described as "responsive but not
reactionary" to Third Point, UBS said: "We think this sends a strong
message to the markets - expect more to come."
The global packaged food sector is convulsing as its main players
struggle with slowing growth, changing consumer habits and the growing
influence of global investment firm 3G Capital. 3G's Kraft Heinz <KHC.O>
launched a surprise $143 billion takeover bid for Unilever <ULVR.L> in
February, sparking a deep review and new agenda at the target company.
Many of the demands laid out in Third Point's letter echo the steps
Unilever took in the wake of the Kraft bid.
Investors said the biggest omission from Nestle's response was any
reference to its 25 billion euro ($28.4 billion) stake in L'Oreal, which
dates back to 1974, when the French heiress Liliane Bettencourt sold a
large part of her holding to Nestle.
That omission and lack of a margin target means the announcement may not
completely satisfy Third Point, which is controlled by billionaire
investor Daniel Loeb. Third Point has declined to comment on the
announcement at this stage and Nestle is expected to say more at its
investor day in September.
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Nestle CEO Ulf Mark Schneider speaks. REUTERS/Denis Balibouse/File
"It's only a start," said Mirabaud Asset Management's Nicolas Burki. "It will
not be enough."
Nestle has long touted the L'Oreal stake as value-creating, and a source
familiar with the company's thinking said there was no change to that view.
The big question, however is what Nestle would do with the cash, besides
buybacks, if it sold down the L'Oreal stake.
The company did say its capital spending would be focused on higher-growth
categories of coffee, pet food, baby food and water. It added consumer health to
the list of priorities, potentially making it a competitor to the likes of
Johnson & Johnson <JNJ.N> and GlaxoSmithKline <GSK.L>.
However, EFG Asset Management's Urs Beck cashed out of his Nestle position on
Monday's price spike and is skeptical that it can find acquisitions big enough
to move the needle for a company with $93 billion in sales.
"The ship is just too big to be steered into different waters through portfolio
management," he said.
VICTORY ON BOTH SIDES
Nestle is Europe's most valuable company, with a market value of $263 billion
last week, before Loeb's position was made public, adding $10 billion in one
The positive reaction most likely reflects the bullishness of long-term
investors rather than event-driven hedge funds looking for quick turnarounds,
says Michael Wegener at Case Equity Partners in Hong Kong.
Wegener said he doubts that many arbitrageurs have moved into Nestle's stock
yet, since the Loeb stake remains too soft a catalyst at this stage.
But one London-based manager of an event-driven hedge fund with no involvement
with Nestle described the situation as a victory for both sides.
"I suspect (Third Point's) presence actually helps Schneider with his change
agenda," said the manager, who asked not to be named. "I suspect the buyback is
not enough, but Third Point is unlikely to feel the need to get shouty."
Swiss activist shareholder Rudolf Bohli said that Loeb, known for campaigns
against Yahoo, Sony Corp and the Dow-DuPont merger, is on the right track.
"Loeb has set the right tone and his agenda is correct," said Bohli, who
recently exited GAM Holding with a profit after failing to replace the financial
company's chief executive.
(Additional reporting by Angelika Gruber and Paul Arnold in Zurich; Writing by
Martinne Geller; Editing by David Goodman)
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