Dan Loeb has returned to his earthshaking activist roots, and in a letter released moments ago, Third Point announced it is now targeting the world’s largest food company, with its biggest bet on a public company in its history, amounting to $3.5 billion.
In the letter, Third Point announced that it currently owns roughly 40 million shares of Nestle, and that its stake, which is held in a special purpose vehicle raised for this opportunity including options, currently amounts to over $3.5 billion. Putting this number in the context of Nestle's market cap of $264 billion, Loeb may have an uphill battle though that never stopped him before.
Loeb's stake of 40 million shares makes him the 6th largest holder of Nestle, above Credit Suisse Asset Management with 38 million shares and below Massachusetts Financial Services Company with 56.8 million. The Top 4 holders are BlackRock, CapRe, Norges Bank, and Vanguard.
Third Point writes that "despite having arguably the best positioned portfolio in the consumer packaged goods industry, Nestlé shares have significantly underperformed most of their US and European consumer staples peers on a three year, five year, and ten year total shareholder return basis. One year returns have been driven largely by the market’s anticipation that with a newly appointed CEO, Nestlé will improve."
While the problems are clear, why did Third Point go activist? To maximize value of course, as It explains:
Third Point invested in Nestlé because we recognized a familiar set of conditions that make it ripe for improvement and change: a conglomerate with unrealized potential for margin improvement and innovation in its core businesses, an unoptimized balance sheet, a number of non-core assets, and a recent history of meaningful under-performance versus peers. It is rare to find a business of Nestlé’s quality with so many avenues for improvement.
As to how it could achieve this, Third Point lays out 4 specifics recommendations:
Third Point intends to play a constructive role to encourage management to pursue change with a greater sense of urgency. We have offered our views in productive conversations with management, which we expect will continue. We believe Nestlé is positioned to create enormous value for shareholders over the next several years if the company focuses on: 1) Improving Productivity; 2) Returning Capital to Shareholders; 3) Re-shaping the Portfolio; and, 4) Monetizing its L’Oréal Stake. We discuss each of these in more detail below.
Loeb's conclusion:
As demonstrated by our significant capital commitment, we are enthusiastic about Nestlé’s prospects. The situation reminds us of similar conditions that existed when we first invested in Baxter in 2015. Some market observers scratched their heads, as they thought the company looked “expensive” and thus underestimated the uplift that is possible when a new leader dedicates himself to better capital allocation, portfolio optimization, and margin improvement with strong shareholder support.
We recognize that even with new leadership and clear options for value creation, change at a company like Nestlé can be complex. It is for this reason that Third Point intends to be an engaged, long-term shareholder and offer our assistance to the management team and Board as they pursue improved performance for all stakeholders. We are confident that by following the path we have outlined, Nestlé will be able to revive its iconic slogan, with a twist: Nestlé makes the very best returns for its shareholders.
For the full breakdown of Loeb's recommendations, see the full letter below.
As Bloomberg notes, the Third Point move comes as Nestle’s new Chief Executive Officer Mark Schneider aims to boost the company’s health strategy as well as focus on the 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.
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.
Full Third Point letter below (pdf link)
http://www.scribd.com/embeds/352220358/content