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Nestlé Braces for Investor Battle -- WSJ

27 Jun 2017 6:32 am
By Saabira Chaudhuri and David Benoit 

This article is being republished as part of our daily reproduction of WSJ.com articles that also appeared in the US print edition of The Wall Street Journal (June 27, 2017).

Newly minted Nestlé SA Chief Executive Mark Schneider is facing the first big challenge of his short career in packaged foods.

Mr. Schneider indicated Monday he plans to continue with his own push to spur growth at the maker of Stouffer's frozen food and Nesquik chocolate milk, but will now have to perform under the pressure of activist investor Daniel Loeb, who is prescribing his own plan for growth.

Late Sunday, Mr. Loeb's Third Point hedge fund disclosed a $3.5 billion stake in Nestlé, demanding a raft of changes it said would boost margins and shares, including the divestment of a long-held stake in L'Oréal SA. In a short response Monday, Nestlé said it keeps an "open dialogue with all our shareholders" but remains "committed to executing our strategy and creating long-term shareholder value."

The Swiss-based company said it had no further comment on Mr. Loeb's stake.

Third Point's stake amounts to just 1.25% of Nestlé, but that makes Mr. Loeb one of the company's top 10 investors. His recommendations come at a time when Nestlé shareholders could find them hard to ignore: Years of slow growth have shaken Nestlé and its consumer-goods competitors, as they contend with changing consumer tastes, a raft of new upstart rivals and other headwinds.

Shareholders welcomed the Third Point investment, sending Nestlé's stock up more than 4% Monday.

Mr. Schneider, 51 years old, took the top job at Nestlé in January. Third Point has been accruing shares since the start of the year, encouraged by the possibilities that come with a new CEO, according to people familiar with the matter.

Nestlé's board plucked Mr. Schneider out of the health-care industry to help diversify from its slow-growing cash cows to healthier foods and products. He moved quickly to shake things up. Shortly after becoming CEO, he abandoned Nestlé's longstanding annual growth target, after years of shortfalls. Earlier this month, he put Nestlé's U.S. confectionery business up for sale.

But he has also resisted some of the more radical approaches taken by competitors. He is an outspoken critic of so-called zero-based budgeting, the cost-cutting technique applied by Brazilian fund 3G Capital at some of the U.S. consumer-goods businesses it steers.

Messrs. Schneider and Loeb met in Switzerland about two weeks ago, according to one of these people, to discuss the investor's ideas for how the company can grow.

Third Point surmised that new management, already motivated to boost margins, was ready to take the steps it was suggesting, according to people familiar with the matter. But the hedge fund wanted to make its views public to rally shareholder support for the changes, one of these people said. Third Point also has concerns about the makeup of the board, which it believes lacks packaged-food and financial expertise, the people said.

Nestlé declined to comment.

Third Point's letter to investors on Sunday identified "a familiar set of conditions that make [Nestlé] ripe for improvement and change." The fund said: "Our recommendations to Nestlé management, if taken together, would dramatically improve both the growth profile and earnings power of the company."

Third Point has tapped Jan Bennink, a food-industry veteran, as its adviser on the investment. While Third Point hasn't specified whether it would seek a board seat at Nestlé, it listed Mr. Bennink's expertise in packaged foods and shareholder returns in its letter. Often activists name advisers as a signal of who they hope to be named to the board down the road.

The hedge fund raised a special $1 billion investment fund for Nestlé in a matter of a week, the people said. EnTrustPermal, an investor in hedge funds that is majority owned by Legg Mason Inc., put $650 million in that fund, according to people familiar with the matter -- a sizable sum for a single investor. EnTrustPermal co-owner Gregg Hymowitz confirmed the firm had invested in the activist play.

Jefferies analyst Martin Deboo said Mr. Schneider has some room to maneuver. "We view [Nestlé] as a proud company with an enduring model," said Mr. Deboo. "We expect them to be wary of bending too readily, too publicly, to the views of an ultimately small shareholder."

Mr. Schneider, a dual U.S. and German citizen, spent the 13 years before Nestlé heading German health-care giant Fresenius SE, which runs hospitals, makes medical equipment and supplies drugs and nutritional products. There, he earned a reputation for deal making and cost-cutting, catching the attention of Nestlé's board. Mr. Schneider is the Swiss company's youngest pick for the top job in 50 years and its first outsider CEO since 1922.

Mr. Schneider quickly decided to scrap the "Nestlé model" -- the company's long-running target of boosting organic sales by 5% to 6% each year -- after it fell short of the target for the fourth year in a row.

This month, Nestlé said it would look to sell its U.S. confectionery arm, which has lagged behind Hershey Co., Mars Inc. and Lindt & Spruengli AG.

The two moves were deemed sensible ones by many analysts, but Nestlé critics, including some shareholders, have long said it needs bolder moves.

Last year, before Mr. Schneider took over, Bernstein analyst Andrew Wood warned Nestlé "may suffer a slow slide to mediocrity" after receiving responses from 75 of the Swiss giant's investors in a poll. Their worries included a weak commitment to cutting costs and rising competition. The polling also revealed frustration about return of capital and mixed views on the company's push into health sciences and skin care.

Mr. Wood hailed Mr. Schneider's appointment, but wrote that the new CEO faced "fundamental operating issues" across Nestlé's business units and said any turnaround would "likely take years not months."

On Monday, Mr. Wood in a note said "Third Point is just saying (perhaps just louder) what others have been thinking and saying for some time."

Nestlé has said it is working to cut costs and sell noncore assets and is exploring innovative ways of reaching customers. It recently took a stake in subscription meals service Freshly and has teamed up with street vendors to sell noodles brand Maggi. The company has also been reducing the salt and sugar in its food and has made a $50 million investment in research and development to turn around its flagging frozen-food business.

Consumer-goods giants the world over are struggling with global markets marked by weaker growth, volatile currencies, political instability and changing consumer tastes. In many places, they are hard-pressed to raise prices in the face of low inflation. Packaged-foods companies are in an even tougher spot. Consumer preferences for healthier, fresher food have forced many to pour money into cutting sugar and salt, without compromising on taste, and to create new brands appealing to preferences for organic or healthy food.

Delivery companies, subscription meals services, private label brands and small, local companies are all now competing for consumers who were once predictable grocery-store buyers of Nestlé brands.

Mr. Schneider has indicated he gets it.

"Size alone does not protect us from the winds of change," Mr. Schneider said at an industry conference in Berlin last week, adding that Nestlé is facing "a constant need to evolve."

--Juliet Chung contributed to this article.

Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com and David Benoit at david.benoit@wsj.com

(END) Dow Jones Newswires

June 27, 2017 02:32 ET (06:32 GMT)

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