Third Point Takes $3.4 billion in Nestle’s Stake

Third Point LLC, a New York-based hedge fund founded by Daniel Loeb, has taken a $3.5 billion stake in Nestle SA, and urged the world’s largest packaged food company to find ways to increase its growth, buy back stock and  shed non-core businesses.

Mr. Loeb’s hedge fund has taken an investment position of roughly 40 million shares or 1.3%, in the company, and has begun productive conversations with management, the U.S-based fund said on Sunday. The stake is one of the largest investments taken by the hedge fund, which pressed for the change in recent years at U.S. internet firm Yahoo and Japan’s  Sony Corp.

Third Point shares in Nestle would make it the company’s eighth-largest shareholder behind the likes of BlackRock, Norges Bank and Capital World Investors, according to Thompson Reuters data.

Third Point revealed its Nestle position in a letter to investors, in which it argued the food company should sell its 23% stake in French cosmetics firm L’Oreal SA, which was worth about $27 billion and sell off nonessential operations as part of a broad shake-up.

L’Oreal shares rose 2.8%.

On the other hand, Nestle, whose products include baby milk, pet food, Nespresso coffee and KitKat chocolate bars, is under pressure to boost profitability as the global food industry is reacting to pressures unleashed by Kraft Heinz’s failed $143 billion takeover approach this year to Anglo-Dutch group Unilever.

Netsle’s shares jumped as much as 4.7% earlier today, touching a record high as investors wait for change.

“Despite having arguably the best positioned portfolio in the consumer packaged goods industry, Nestle’s shares have significantly outperformed most of their U.S. and European consumer staples peers on a three year, five year and ten year total shareholder return basis,” the fund said in a statement.

Nestle is the biggest player in a packaged food industry struggling with a slowdown in emerging markets, falling prices in developed markets and consumers demanding fresher, healthier products.

Third Point is proposing Nestle to set a formal profit margin target of 18-20 percent by 2020. Nestle’s current operating margin is about 15%.

“We feel strongly that in order to succeed, Dr. Schneider (Nestle’s current CEO) will need to articulate a decisive and bold action plan that addresses the said culture and tendency towards incrementalism that has typified the company’s prior leadership and resulted in its long-term underperformance,” Third Point wrote in a letter.

Third Point is known for agitating for change at public companies. Mr. Loeb played a big role in shaking up internet technology company Yahoo Inc. as an activist shareholder and board member some years ago.

Jan Bennink, Dutch food industry veteran, is advising Third Point on its Nestle investment and has also invested personally alongside the fund, Third Point said. Bennink ran baby food maker Royal Numico when Danone purchased it for 16.8 billion in 2007, oversaw the break-up of Sarah Lee and ran its coffee business, which is now owned by JAB Holding.

Earlier this month, Nestle said it might sell its $900 million-a-year U.S confectionery business in its latest effort to improve the health profile of its spreading portfolio. Analysts also guess that it could sell its U.S frozen food business.

Meanwhile, Nestle SA traded 3.84%, or 3.15, to CHF 85.25, by 11:58AM GMT+2. It opened in CHF 85.5, with a session high of CHF 86, and a session low of CHF 84.90. Its market capitalization was 265.31 billion, with a P/E ratio of 30.95 and a dividend yield of 2.70%.

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