Nestlé takes on challenge of the activist investors
Financial engineering is a technique that does not always serve the noblest aspirations and it has become a big issue in European business circles lately, thanks to the arrival of a few hot-shot American hedge funds.
The funds, only too aware of dwindling opportunities at home, have decided to cast their considerable nets in a recovering Europe and, of course, are no respecters of size, status or history.
Earlier this year, the Anglo Dutch Unilever group fended off the unwelcome attentions of Kraft Heinz, backed by the Brazilian 3G investors.
The latest sortie is from US hedge fund Third Point, and it is targeting Nestlé, the 150-year-old 'grande dame' of Swiss business.
Third Point has taken a $3.5bn (€2.9bn) stake in the Swiss group, the world's largest consumer concern.
Some people believed Nestlé, with a market value of €195bn, was beyond the reach of activist investors. Third Point is keen to kill that notion.
Nestlé is a remarkable company by any yardstick. It operates 450 factories in 80 countries (one in Askeaton, Co Limerick), has sales of €68bn in 191 countries, with operating profits of €10bn, and employs 328,000 people worldwide.
It is as global as possible, as its sales breakdown shows 32pc in Europe, 30pc in the Americas, 18pc in Asia and 22pc in the rest of the world.
The company has the benefit of a huge range of products, stretching from baby foods, pet foods, soups, coffee, water and pasta, with thousands of brands like Nespresso, KitKat and Perrier. A large number of its brands have sales of more than €1bn per annum.
Third Point, on the other hand, does not know the word 'timid'. It was founded in 1995 by a 55-year-old Californian, Daniel Loeb, who has become famous for a fiery temperament and a sharp tongue. He once told an American CEO to "retreat to your mansion in the Hamptons where you can play tennis and hobnob with your fellow socialites". Mr Loeb has had a long list of corporate clashes.
In the last five years he was responsible for forcing out Sotheby's' chairman, the ousting of Yahoo's chief executive and now wants Dow Chemicals split up. He was, however, burnt when he invested in Sony, demanding the group be split, and the Japanese simply ignored him. Mr Loeb has indicated that his shopping list for Nestlé includes selling its 30-year investment in L'Oreal, worth $25bn (€21bn); he wants a share buyback programme and thinks profit margins must improve. Nestlé knows that when Third Point comes stomping its feet and instituting proxy battles it has to be taken seriously even if such behaviour does not always sit well on the shores of Lake Geneva. So far there have been no angry letters or demands for board changes, only a reference to the "staid" Swiss Group and it being "slow moving" and "stuck in its old ways".
While Mr Loeb speaks well of Nestlé (so far) he wants management to pursue change with greater urgency.
Interestingly, the arrival of Third Point has been positive for the share price. The price today is €80.85.
Mr Loeb has indicated a desire to work with newly appointed ceo Mark Schneider, as a long-term shareholder. However, the long term in 'hedge fund speak' is usually five years, a blip in the history of Nestlé.
It would appear Mr Schneider is already ahead of Mr Loeb. He is investing in growth areas like beverages, pet care and nutrition, which account for two-thirds of Nestlé operating profits. He plans exiting the low-margin US confectionery business.
Nor is Mr Loeb's share buyback new to Nestlé. The group has returned €115bn in 10 years to its shareholders. Mr Schneider announced a further buyback after Third Point invested. Mr Loeb's approach has some observers scratching their heads, wondering if this is adapting to Europe or is it a Wall Street wolf in sheep's clothing. The jury is out.
Nothing in this section should be taken as a recommendation, either explicit or implicit to buy any of the shares mentioned.