Nestle targeted by activist in big gamble

in New York

Dan Loeb has amassed a US$3.5-billion stake in targeting Europe’s largest company in the biggest bet of his two-decade career as an activist investor.

Third Point, Loeb’s hedge fund, owns about 40 million shares in the Vevey, Switzerland-based company, according to an investor letter released Sunday after Bloomberg first reported the position. The fund encouraged Nestle to sell its stake in cosmetics maker

increase leverage for share buybacks and adopt a formal profitability target, among other suggestions. The shares rose as much as 4.8 per cent in Zurich, the biggest intraday advance since January 2015.

“It is rare to find a business of Nestle’s quality with so many avenues for improvement,” wrote New York-based Third Point, which holds a 1.3 per cent stake.

The Nestle position adds to a recent push into Europe for Loeb, who’s better known for his campaigns in the U.S. and Japan. Third Point, citing an improved economic outlook and declining political risks in the region, has also invested in UniCredit SpA, the second-largest listed bank in Italy, and German utility EON SE.

Loeb, 55, has gone after huge targets before, but none match up to the size of Nestle: It’s not only his single largest investment since Third Point was founded in 1995, but also the biggest company he’s ever targeted. Nestle’s market valuation of US$263 billion, as of last week, is the largest in Europe.

In 2014, the activist disclosed a stake in

— its largest investment at the time — and called for a spinoff of the company’s petrochemical business to improve profitability. He later pushed for the removal of Dow chief executive Andrew Liveris, just days after the company agreed to combine with DuPont Co. in the largest-ever chemicals merger. While Liveris has confirmed he plans to step down once the deal is completed, Loeb is keeping up the pressure: in May he called for the combined Dow-Dupont to carve itself into six companies to unlock US$20 billion of additional value.

In Japan, Third Point’s six months later it revealed plans to restructure its store portfolio and set up a property development unit.

The Third Point investment also puts a spotlight on Nestle’s new chief executive officer Mark Schneider, after 2016 sales growth fell to the slowest pace in at least a decade and the stock price lagged behind other consumer giants in recent years.

“We are convinced that Mark Schneider has very ambitious plans for Nestle, including some or all of Third Point’s proposals,” company’s priorities toward healthier foods and fastergrowing businesses since taking the helm on Jan. 1. Nestle said this month it may sell its U.S. chocolate and candy unit, which includes brands such as Butterfinger and Baby Ruth.

“As always, we keep an open dialogue with all of our shareholders and we remain committed to executing our strategy and creating longterm shareholder value,” Nestle said in an emailed comment Monday.

While Third Point applauded Nestle’s plans for the confectionary business and called Schneider a highcalibre executive with an impressive track record, the hedge fund urged him to articulate a “bold” action plan that addresses Nestle’s “staid culture and tendency towards incrementalism.”

“Ultimately, they have been very slow to respond to changes in the market,” James Santo, a senior vicepresident at asset manager

in Sydney, said by phone on Monday. “That’s clearly why we’re seeing the pressure coming from the shareholders now.”

Nestle, which makes everything from Nespresso coffee to Gerber baby food, should conduct a review of its more than 2,000 brands and reduce exposure to underperformers, Third Point said.

The company should adopt a formal target of boosting its operating profit-margin to as much as 20 per cent by 2020, from about 15 per cent in 2016, and double its leverage ratio to free up more cash for stock buybacks, the hedge fund said.

The time is also right for Nestle to sell its L’Oreal position, Third Point said. Nestle owns about 23.2 per cent of the cosmetics giant, a stake valued at about US$27 billion, according to data compiled by Bloomberg. L’Oreal rose as much as 4.8 per cent in Paris trading.