NEW YORK/SAN FRANCISCO – Nestle SA is being targeted by activist investor Dan Loeb’s hedge fund Third Point, which has built a stake of more than $3.5 billion in the world’s biggest food company.
Previously, Third Point has focused much of its recent activism in Japan, where investments have included Seven & I Holdings Co. and Sony Corp.
Loeb owns about 40 million shares and some options in Switzerland-based Nestle, according to an investor letter released Sunday after Bloomberg first reported the activist stake. The fund intends to encourage management to “pursue change with a greater sense of urgency” by selling Nestle’s stake in L’Oreal SA, increasing leverage for share buybacks and reviewing its portfolio, among other suggestions.
“Despite having arguably the best positioned portfolio in the consumer packaged goods industry, Nestle shares have significantly underperformed most of their U.S. and European consumer staples,” Third Point wrote in the letter. “It is rare to find a business of Nestle’s quality with so many avenues for improvement.”
Nestle owns about 23.2 percent of cosmetics giant L’Oreal, according to data compiled by Bloomberg, a stake with a market value of about $27 billion. In addition to selling that holding, Third Point wants Nestle to scour its portfolio of more than 2,000 brands for possible sales and consider “accretive, bolt-on acquisitions in high growth and advantaged categories.” The firm also called on Nestle to set a formal operating margin target of 18-20 percent by 2020.
A representative for Nestle was unable to immediately comment.
Third Point, better known for targeting U.S. and Japanese companies, has recently been drawn to European investment opportunities, according to the firm’s first-quarter investor letter.
“We are seeing more opportunities in Europe because of strong and improving economic data, a trend that will likely continue now that the French elections have passed without incident,” Third Point wrote in that April 27 letter.
The move comes as Nestle’s new Chief Executive Officer, Mark Schneider, aims to boost the company’s health strategy, as well as focus on businesses that are growing fastest such as coffee and pet food. Food companies are under pressure to reduce costs, after Kraft Heinz Co.’s unsuccessful bid for Unilever earlier this year showed that even the largest players could become targets.
Chocolate makers especially are grappling with weak U.S. consumption as Americans increasingly turn their backs on sugar. Nestle said this month it may sell its U.S. sweets unit, which includes brands such as Butterfinger and BabyRuth.
Consumer companies have been popular targets for activist shareholders because of their bloated expenses and lackluster growth. So far, activist investors have predominantly targeted U.S. companies, putting pressure on them to boost margins.
In 2015, billionaire hedge fund manager Bill Ackman amassed a $5.6 billion stake in snack giant Mondelez International Inc. and called for management to improve the company’s performance, leading to cost cuts. Procter & Gamble Co. has also attracted an activist; Nelson Peltz’s Trian Fund Management LP revealed a new stake in the consumer-products maker in February and has amassed a stake valued at about $3.3 billion, according to its latest regulatory filing.
Third Point has targeted European companies before. Vitamin maker Royal DSM NV also attracted the activist, and went on to sell its majority stake in a basic plastics and resins unit to CVC Capital Partners after facing calls to break up. The hedge fund also said in April it had invested in UniCredit SpA, the second largest listed bank in Italy, which has a significant presence in Germany and Austria, drawn by the bank’s low valuation and €13 billion rights issue in March.
Third Point also invested in German utility operator E.On, which spun off its generation assets into Uniper last year, arguing the remaining regulated grids and renewables business “is currently misunderstood by the market and attractively priced.”
Founded in 1995 by Loeb, Third Point in April said it took a stake in Honeywell International Inc. and called for the industrial manufacturer to spin off its aerospace business.
“Third Point intends to play a constructive role to encourage management to pursue change with a greater sense of urgency,” the firm wrote of Nestle in Sunday’s letter. “We have offered our views in productive conversations with management, which we expect will continue.”
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