Like Nelson Peltz at Procter & Gamble, activist investor Daniel Loeb believes that fundamental changes are necessary at Nestlé, in order for the company to return to strong growth.
The investor, whose hedge fund Third Point acquired around 40 million shares in the Swiss food giant last summer – around $3.5 billion – has been nothing short of outspoken on the future direction of the company under recently appointed chief executive Mark Schneider, who is just completing his first year in the job.
‘Thoughtful Review’ Of L’Oréal Stake
Earlier this week, in a letter to Third Point shareholders, Loeb offered a ‘warts and all’ appraisal as to where he believes Nestlé is underperforming, with his most critical words reserved for the Swiss firm’s stake in L’Oréal, which the Vevey-based company has held since 1974.
‘Nestlé needs to conduct a thoughtful review of its financial stake in L’Oréal,’ Loeb wrote in the letter. ‘While the investment, made in 1974, has produced excellent returns historically, that alone is not a sufficient reason to maintain the status quo.
‘Today, it is simply unclear how owning a minority stake in a beauty business makes Nestlé a stronger “nutrition, health, and wellness” company. We continue to believe that this financial investment ought to be monetised and that there are better uses for this capital,’ Loeb wrote.
On Nestlé Skin Health, the division that was launched as a joint venture with L’Oréal in 2014, amid much fanfare, Loeb also pulled no punches, writing, ‘Forays into “skin health” seem unrelated to Nestlé’s core business and like a costly mistake that should be unwound.’
In the eyes of many analysts, the writing appears to be on the wall for Nestlé Skin Health, which comprises about 5% of the group’s sales – last August, the group said that it was closing its Egerkingen factory, in northern Switzerland, which produces skincare products for the Skin Health portfolio. Following Loeb’s words, Schneider may face renewed calls to divest the business.
Portfolio Adjustment
On the subject of divestments, Loeb said that the group’s recent offloading of its US confectionery assets “secured a very attractive price (more than three times sales)”, however, he is eager to see “a decisive disposal of other ill-fitting businesses”.
On the acquisition front, too, Nestlé needs to move faster to “increase its exposure to the high-growth categories highlighted by management, namely coffee, pet care, water, and nutrition”, with Loeb noting that “these categories are growing faster and have higher margins than the rest of Nestlé’s portfolio, are on-trend with modern consumers, and lend themselves well to premiumisation over time.”
Acquisitions in these areas, he noted, “have been limited to a few, small deals”.
The recent Atrium Innovations acquisition, however, which Greg Behar, CEO of Nestlé Health Science said in December is a “natural complement to our consumer-care portfolio, which offers nutritional solutions in the areas of healthy ageing, healthy growing, gut health, and obesity care”, doesn't fit as well with Loeb’s vision for the business.
“We would also like Nestlé to better explain to shareholders the rationale behind expanding further into consumer health care,” he said. “The recent acquisition of Atrium Innovations, and rumours that the company is bidding on larger assets in this category have left some shareholders confused.”
‘Clarify The Message’
Lastly, Loeb has called for Nestlé to support its vision of ‘nutrition, health, and wellness’ with real action, if Schneider is to “reaccelerate organic sales growth to mid-single digits and set a formal margin target of 17.5% to 18.5% by 2020”.
In particular, now that the chief executive has completed his first year, and there is “new blood” on the company's boars, Loeb is hopeful that Nestlé will be able to “move with greater alacrity” going forward.
“Nestlé defines itself as a company focused on ‘nutrition, health, and wellness’, but many of its assets do not align with that vision,” he said. “Within food and beverage, which accounts for 95% of sales, many products like ice cream and frozen pizza do not meet the company’s brand aspiration of being better for you.”
All in all, Loeb has said that Third Point continues to “support Dr Schneider and Nestlé management”, but he also believes that in order for “greater capital appreciation and faster dividend growth for shareholders”, the former Fresenius boss will take the group’s advice to heart.
Over to you, Mark ...!
© 2018 European Supermarket Magazine – your source for the latest retail news. Article by Stephen Wynne-Jones. Click subscribe to sign up to ESM: The European Supermarket Magazine.
