Sector News

Nestlé has given in to all of Dan Loeb’s demands – except one

September 27, 2017
Food & Drink

Nestlé set itself an operating margin target for the first time, in a fresh concession to Dan Loeb, the activist investor whose Third Point fund began pushing for change at the Swiss giant earlier this year.

Investors are looking for proof that the world’s largest packaged food company can improve its performance under new Chief Executive Mark Schneider, as the food sector faces a challenge from smaller upstart brands and changing consumer tastes and habits.

The maker of KitKat chocolate bars and Nespresso coffee was setting out explaining how it will reach mid-single figure organic growth and an underlying trading operating profit margin of 17.5-18.5 percent by 2020.

Nestlé, which is Europe’s largest company, said the comparable margin figure was 16 percent in 2016. It has previously focused more on setting sales growth targets, but Schneider said it was important at this stage to balance both. Loeb had asked for a formal margin target of 18-20 percent when he unveiled a $3.5 stake in Nestlé in June.

He added it was unlikely this new target would be raised. That makes it look less ambitious than its biggest European rival in food, Unilever, which has set a goal of 20 percent for its underlying operating profit margin by 2020. That goal too was a response to pressure from outside, in the form of a $143 billion takeover bid from Kraft Heinz.

In another nod to Loeb, Nestlé also said it will accelerate its share buyback program of up to 20 billion Swiss francs ($20.67 billion) by spreading it evenly over three years, instead of backloading it in 2019 and 2020 as initially announced in June.

Others were also positive.

“We consider the new margin target as reasonable because it leaves room for investment in the future and to reach the unchanged target of mid-single digit sales growth by 2020,” ZKB analyst Patrik Schwendimann said in a note.

Last week’s death of French billionaire Liliane Bettencourt, heiress of L’Oréal, in which Nestle has a 23 percent stake, also stirred speculation on potential changes in the cosmetics firm’s ownership. Nestlé has pre-emptive rights on the Bettencourt family stake if her heirs decide to sell it, but according to the Financial Times, no deal would be possible for at least six months after her death.

Schneider said there was currently no change to Nestlé’s approach to this investment.

Instead, the company’s presentation said it will “pursue external growth opportunities that fit within targeted categories and geographies, deliver attractive returns, and build on the company’s leadership positions,” the company said.

Selling the Nestlé stake is now the only one of Loeb’s demands that the company hasn’t met. With an operating margin of some 17.9%, it already meets the operating margin target.

Nestlé confirmed it would focus capital spending on high-growth categories coffee, petcare, infant nutrition, and bottled water and said it also wanted to pursue opportunities in consumer healthcare. Earlier this month, it bought a majority stake in California-based Blue Bottle Coffee, its first step into the hipster world of specialty bars and brews.

Source: Fortune

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