National Post (National Edition)
Nestlé eyes takeovers, $27.4B share buyback
ZURICH • Nestlé SA plans a 20-billion-franc ($27.4 billion) share buyback and said it’s on the hunt for acquisitions, just days after activist investor Dan Loeb disclosed a stake in a bid to shake up the world’s largest food company.
Nestlé will funnel investment into coffee, pet care, baby food and bottled water and pursue opportunities in consumer health care as it starts its biggest buyback in a decade, the Vevey, Switzerland-based maker of Gerber baby food and DiGiorno pizza said Tuesday.
The buyback was announced after Loeb’s hedge fund company Third Point urged the company to take such a step. The food-maker completed its last repurchase in 2015, and new CEO Mark Schneider said in February in his first public appearance as chief that buying back stock is a lower priority than reinvesting in Nestlé’s business and paying dividends. The company says it has bought back 47 billion francs worth of shares since 2005.
The Swiss company’s reaction echoes the strategic shift Unilever announced in April after Kraft Heinz Co.’s failed takeover bid. The Anglo-Dutch company said it would buy back five billion euros of stock and divest its spreads business as the unsolicited $188-billion offer led CEO Paul Polman to pledge better shareholder returns. Both companies have been wrestling with slowing growth in their food businesses as consumers turn away from sugary snacks and processed fare.
Tom Russo, partner at Gardner Russo & Gardner, which has 10 per cent of its US$12 billion under management invested in Nestlé, said the plan showed a new willingness to engage with investors under Schneider. Former chief Peter BrabeckLetmathe once threatened to quit if shareholders didn’t approve plans to make him both CEO and chairman.
“It’s extraordinary,” Russo said. “There’s a huge amount of concession to the proposals. Historically Nestlé would have been considered really impregnable. The world no longer offers management the ability to say ‘just go away.’”
In addition to recommending a buyback, Loeb urged Nestlé to sell its 23-per-cent stake in cosmetics maker L’Oreal SA, eject underperforming brands and take on more debt. Schneider has already announced a review of Nestlé’s U.S. confectionary business, including the Butterfinger and Baby Ruth brands, that could result in a sale.
Third Point did not immediately respond to a request for comment.
Jean-Philippe Bertschy, an analyst at Bank Vontobel AG, said it was likely that Nestlé had been working on the plan before Loeb disclosed his investment over the weekend.
“Nestlé isn’t going to do quick reactions on shareholder demands,” he said. “This move is an example of Mark Schneider having come in and carefully analyzing the company since the beginning of the year. It’s just the tip of the iceberg, we’re going to see much more.”
Nestlé said it will start repurchasing shares July 4 and the program will run through 2020. The company said the buyback will likely be backloaded in 2019 and 2020 to allow for acquisitions. The company said it expects a net debt to EBITDA ratio of about 1.5 in 2020.
Nestlé was the weakest performer among six of Europe’s biggest consumergoods stocks including Unilever and Anheuser-Busch InBev NV in the previous three years, Third Point said when announcing the purchase. The company’s 2016 sales growth fell to the slowest pace in at least a decade amid sluggish demand and Schneider abandoned Nestlé’s long-standing revenue target two months after becoming CEO.
Nestlé said that if it makes a “sizable” acquisition, it may modify the buyback plan. The company bought Pfizer Inc.’s Wyeth baby nutrition unit for almost US$12 billion in 2012, Gerber Baby Foods in 2007 for US$5.5 billion and the remainder of its Galderma joint venture with L’Oreal SA for US$4.3 billion in 2014.