An activist investor is targeting the multinational food giant. But do his proposals make sense? Ben Judge reports.
Activist investor Daniel Loeb’s Third Point hedge fund has bought $3.5bn worth of shares of Swiss food and beverage group Nestlé – roughly 1.3% of the company – and has called for an overhaul of the firm in Loeb’s latest bid to maximise shareholder value. The “most eye-catching” demand, says Alistair Osborne in The Times, is selling Nestlé’s 23% stake in cosmetics firm L’Oréal, which is currently worth €25bn, and which Loeb himself admits has been a “superb investment”.
Still, many of his ideas make good sense, says Sarah Gordon in the Financial Times. Sales are rising too slowly, margins are half those of Kraft Heinz and the balance sheet is “under-leveraged”. And while the L’Oréal stake is certainly profitable, it “makes little strategic sense”.
Usually, attention from any activist investor would “spell a whole heap of trouble for management”, but this may be an exception: Loeb “has come to praise the CEO, not bury him”, says Andrea Felsted on Bloomberg Gadfly. Nestlé appointed its chief executive, Mark Schneider, in June 2016, “tasked with shaking up the lumbering giant”, but he only took up his position on 1 January this year.
Loeb has already praised him for “some recent strategic moves”, but has urged him to go further, with measures that include improving the company’s profit margin, loading up on debt to buy back shares, and divesting non-core businesses. Having “a powerful backer like Loeb” could strengthen Schneider’s hand and turn out to “be a blessing”.
Indeed, a day after
Loeb signalled his interest, Nestlé announced a CHF20bn share buyback programme. It has already said that it may put its US confectionery business up for sale, and emphasised that it plans to focus on high-growth product areas including coffee, pet care and bottled water, says Deirdre Hipwell in The Times. It is also hoping to accelerate growth in its healthcare division.
Loeb’s ideas “are sensible but nothing that other shareholders haven’t called for in the past”, says Carol Ryan on Breakingviews. The bigger issue is Nestlé’s “crunchy governance”, which is likely to remain a stumbling block for Schneider.
Any changes will have to be approved by his predecessor, Paul Bulcke, who was installed as chairman in an “unhelpful Nestlé tradition” of moving chief executives upstairs. If Loeb wants to shake up the firm’s “slow-moving culture”, that needs to come from above, with a new chairman. “Schneider has the potential to alter Nestlé for the better, but real change needs to start higher up.”
City talk
• Lossmaking toymaker Hornby is an ailing company “synonymous with a bygone era”, says Kate Burgess in the Financial Times: a “zombie” business “kept going by nostalgia and investors’ attachment to childhood pastimes”. Majority shareholder Phoenix Asset Management has just made a mandatory offer for the company after buying out Hornby’s second-biggest shareholder. Phoenix says it wants Hornby to remain listed on the stockmarket. “Sentimental souls who hold on to their shares may be grateful for that,” says Burgess. But in truth, “this may be the chance for… investors to put what money they have left to better use elsewhere”.
• Despite falling like-for-like sales at both Debenhams and Carpetright, the two retailers are upbeat about growth in digital sales, says Matthew Vincent in the Financial Times’s Lombard column. However, “no amount of digital dressing-up can disguise the underlying trends”. Debenhams’ online sales still represent just 17% of its total, and Carpetright’s web sales amount to the equivalent of one shop’s turnover. “Both remain very much high-street businesses – with three common high-street problems,” says Vincent: the wrong products, the wrong real estate and too much cost.
• A shareholder revolt at gas storage firm InfraStrata sent the company’s shares up by almost 9% after the entire board was ousted, says Daniel Flynn in the Daily Mail. The outgoing board has been replaced by new chief executive Adrian Pocock and interim chairman Peter Wale. Both are shareholders, and have been calling for the board to be removed since May. More than 55% of InfraStrata’s shareholders voted in favour of the action at the annual general meeting on Tuesday. The joint managing director had resigned the day before the AGM “to pursue new opportunities”.