Third Point’s $3.4 billion stake in Nestle

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Mr. Loeb’s hedge fund Third Point has taken an investment position representing 1.3% share of the company, and has begun “productive conversations” with management. The stake, including options, is worth approximately $3.4bn. The stake is one amongst the biggest ever taken by the hedge fund on a public company, which is run by the American Investor Dan Loeb.

Third Point disclosed its position in a letter to investors, within which it urged the world’s largest packaged foods producer to boost its margins, repurchase stock, and shed non-core businesses.

In that letter, Third Point stated that in order to succeed, Dr. Schneider will have to articulate a decisive and bold action plan, addressing staid culture, and tendency toward incrementalism. This has typified company’s prior leadership, and resulted in its long-term underperformance. The hedge fund stated that by 2020, Nestle must set a proper margin target of 18% to 20%, so as to increase productivity which currently is about 15%. The hedge fund further stated that the company will sell its 23% stake to French cosmetics firm L’Oreal for generating capital to buy back stock among other suggestions.

“It is rare to find a business of Nestlé’s quality with so many avenues for improvement,” wrote Third Point.

Nestle, which produces everything from coffee to baby food, should conduct a review of its 2,000 plus brands, and reduce exposure to underperformers, according to Third Point. It also stated that the company must adopt a formal target of boosting its operating profit margin to as much as 20 percent by 2020, from about 15 percent in 2016. It must double its leverage ratio to free up more cash for stock buybacks.

Being the biggest player in packaged food industry, sales of Nestle products including baby milk, pet food, Nescafe coffee, and chocolate bars (Kit Kat) are impeded owing to factors such as slowdown in the global foods markets, falling costs in developed markets, and continuously changing customers demand. Nestlé’s new chief executive, Mark Schneider, who took charge in January, has already started shifting company priorities towards healthier foods. He has also been attempting to accelerate development of the company since he took command. The appointment of first CEO from outside the company, in nearly a century, is seen as an acknowledgment of Nestlé’s requirement for new thinking. In February, he scrapped Nestlé’s ongoing sales target- as it reported unsatisfying annual results for four successive years. He also let the competitors know about these incidences by signing a cautious tone in an uncertain environment.

“We don’t believe in that model. We don’t believe it is proven in its long-term viability,” he said. “Strong brands either grow or die and we are committed to grow,” said Schneider at the annual meeting of Consumer Goods Forum (CGF) that the world had changed dramatically over the past 30 years.

Nestle stated earlier this month that it might sell its $900 million-a-year U.S. confectionery business including brands such as Butterfinger, and Baby Ruth, in its latest effort to improve health profile of its sprawling portfolio.

 

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