Dan Loeb Tries Playing Nice for His $3.5 Billion Nestle BetBy and
Activist praises Nestle’s new CEO in latest investor letter
Third Point said to have met management, Schneider this month
Dan Loeb once branded a CEO who’d defied him as a ‘CVD’ -- chief value destroyer.
He went on to call the two great-grandsons of that company’s founders members of the “Lucky Sperm Club.”
To another CEO, Loeb once advised: “Do what you do best: Retreat to your waterfront mansion in the Hamptons where you can play tennis and hobnob with your fellow socialites.”
All that was more than a decade ago, when Loeb’s activist hedge fund -- and the investor himself -- were younger, and building their reputation on Wall Street as Generation X’s answer to the green-mailing takeover barbarians of ’80s merger mania.
Today, at 55, Loeb is no longer the angry young man he used to be. But he still thinks he knows how to run public corporations better than their executives do, and he’s just found his biggest target yet: Nestle SA.
With a $3.5 billion stake, it’s not only his largest investment since he founded hedge fund Third Point in 1995, but also the biggest company Loeb has ever gone after. While some of his more recent targets have been substantial -- from Yahoo! Inc. to Dow Chemical Co., Sony Corp. and Baxter International Inc. –- he largely focused on smaller companies earlier in his career.
This time, Loeb has come to praise the CEO, not bury him. He no longer needs tart words to get people to notice him. In a letter released Sunday detailing the investment, Loeb praised Nestle Chief Executive Officer Mark Schneider for some recent strategic moves. At the same time, the money manager urged Schneider to articulate “bold’’ action that addresses Nestle’s “staid culture.’’
“Dan Loeb literally invented the poison pen,” said Kai Liekefett, a partner and head of the shareholder activism response team at Vinson & Elkins LLP.
His early letters to boards had a reputation for being as humorous as they were scathing and gained Loeb a great deal of notoriety, Liekefett said. There is a big difference between how the investor operated in the early 2000s and how he does now, Liekefett said.
“He doesn’t have to do it any more,” he said. “It’s always better to get what you want without a proxy fight or a public campaign.”
The Nestle position adds to a recent push into Europe for activists like Loeb, who are better known for campaigns in the U.S. and Japan. Even so, the outsize stake sent ripples through the continent’s often stodgy corporate world.
Third Point has been building its position in Nestle since the end of the first quarter, according to a person familiar with the details, meaning it’s already seen some gains: Nestle shares were up about seven percent from April 1 through Friday, before Bloomberg first reported the activist’s stake. Loeb and Schneider, Nestle’s first outside CEO in almost a century, met earlier this month, the person said, asking not to be identified as the matter isn’t public.
While the hedge fund made clear in its letter that it’s thinking long-term with Nestle, setting targets on margins to reach by 2020, the first test could come sooner than that: Schneider has promised to reveal his strategy at an investor day in September.
Loeb is aiming high with Nestle as activist investors enjoy a resurgence of client inflows and returns. Third Point’s flagship fund gained almost 10 percent in the first five months of 2017, part of an industry-wide rebound that saw event-driven funds return 5.6 percent on an asset-weighted basis, the most among the main strategies tracked by Hedge Fund Research Inc.
Loeb, who makes wagers in stocks and fixed income, said in May that he’s shifting his portfolio to profit from activist investing, while scaling back bets in the bond markets after strong gains in 2016. The money manager said that he was excited about several investments -- some undisclosed at the time -- in “companies that are under earning that have a real ability to drive earnings growth that isn’t yet perceived by the general public.”
Not everyone’s convinced Nestle needs drastic changes to secure its future.
“Anything is possible, but I’m not totally convinced that Dan Loeb has a better strategic vision for the company than its own management,” Stephen Macklow-Smith, head of European equity strategy at JPMorgan Asset Management in London, told Bloomberg TV.
Loeb, of course, has beaten the odds before. He was playing the stock market as a high school student in California and arrived in New York at a time when corporate raiders like Carl Icahn and T. Boone Pickens were launching aggressive proxy battles against companies such as Time Warner and Blockbuster.
Early on, Third Point went after a string of small companies, like Hitsgalore.com Inc., and soon developed Loeb’s strategy of sending out colorfully worded letters to companies he was targeting.
To the CEO of Star Gas, Loeb wrote in 2004: “A review of your record reveals years of value destruction and strategic blunders which have led us to dub you one of the most dangerous and incompetent executives in America.’’
Third Point later had some of the most high-profile activist pushes in recent memory, including at Yahoo, Baxter and Dow -– the latter two its biggest initial investments until now. The hedge fund was behind Google veteran Marissa Mayer’s appointment as CEO at Yahoo! and made a fortune before the company’s own fortunes turned for the worse under her leadership.
Loeb’s record is not without blemishes, including campaigns at companies like Sony, where he struck out trying to convince the Japanese electronics maker to sell part of its entertainment unit.
The majority of the companies he has invested in, however, traded up during the period which his fund held a position, according to data compiled by Bloomberg.
The bet on Nestle sets itself apart from previous campaigns in part due to its sheer size. The Vevey, Switzerland-based company had a market valuation of $263 billion as of last week, making it the largest in Europe. That doesn’t necessarily mean it’s more difficult to influence: In 2013, Jeff Ubben’s ValueAct Capital Management won a board seat at Microsoft Corp. -- valued at the time at about $270 billion -- despite owning less than 1 percent of the tech giant’s shares.
By praising Schneider, Loeb is already casting himself as an ally to help Nestle’s new CEO restructure the company and boost the stock, rather than as an antagonistic outsider.
Third Point owns about 40 million shares and some options in Nestle, according to the investor letter. The fund is encouraging Nestle to sell its stake in cosmetics maker L’Oreal SA, increase leverage for share buybacks and adopt a formal profitability target, among other suggestions.
Schneider, 51, has already started shifting the company’s priorities toward healthier foods and faster-growing 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 long-term shareholder value,” Nestle said in an emailed comment Monday.
— With assistance by Carson Bednar, Alex Barinka, and Simone Foxman