Investor-Friendly Stance Boosts Nestle as Loeb Gets Quick Answer

  • Shares rise after food giant announces $21 billion buyback
  • Announcement comes days after Loeb’s Third Point buys stake

Nestle Plans $21 Billion Share Buyback

Investors welcomed the shareholder-friendly stance adopted by Nestle SA after hedge-fund activist Dan Loeb disclosed a bid to shake up the world’s largest food company.

The stock rose as much as 1.7 percent Wednesday after the company said it plans a 20 billion-franc ($21 billion) buyback and said it’s on the hunt for acquisitions. The move, late Tuesday, came just days after Loeb’s Third Point said he had bought a $3.5 billion stake in the Vevey, Switzerland-based company.

“Nestle’s value-creation model might be seen as a response to recent activist overtures, though the company insists its comprehensive review took place in early 2017,” Charlie Mills, an analyst at Credit Suisse, wrote in a note. “It certainly points to a faster pace of change at the group going forward, with growth the overriding agenda.”

The buyback and other moves signal that new Chief Executive Officer Mark Schneider, who took over this year after a career in health care, is wasting little time in revamping Nestle in response to slowing growth in the food industry. As consumers turn away from sugary snacks and processed products, companies like Nestle and Unilever are coming under pressure from shareholders to boost returns. The Anglo-Dutch company also announced a buyback and other measures in response to a failed takeover approach from Kraft Heinz Co. earlier this year.

Nestle will funnel investment into coffee, pet care, baby food and bottled water and pursue opportunities in consumer health care as it starts its biggest buyback in a decade, the owner of Gerber baby food and Perrier mineral water said.

Tom Russo, partner at Gardner Russo & Gardner, which has 10 percent of its $12 billion under management invested in Nestle, said the plan showed a new willingness to engage with investors under Schneider. Former chief Peter Brabeck-Letmathe once threatened to quit if shareholders didn’t approve plans to make him both CEO and chairman.

“It’s extraordinary,” Russo said. “There’s a huge amount of concession to the proposals. Historically Nestle would have been considered really impregnable. The world no longer offers management the ability to say, ‘Just go away.’”

The buyback was announced after Loeb’s hedge fund company Third Point urged the company to take such a step. The food maker completed its last repurchase in 2015, and Schneider said in February in his first public appearance as chief that buying back stock is a lower priority than reinvesting in Nestle’s business and paying dividends. The company says it has bought back 47 billion francs worth of shares since 2005.

Loeb also urged Nestle to sell its 23 percent stake in cosmetics maker L’Oreal SA, eject underperforming brands and take on more debt. Schneider has already announced a review of Nestle’s U.S. confectionery business, including the Butterfinger and BabyRuth brands, but Nestle did not address Loeb’s other demands in its statement.

Third Point did not immediately respond to a request for comment.

Nestle said it will start repurchasing shares July 4 and the program will run through 2020. The company said the buyback will likely be backloaded in 2019 and 2020 to allow for acquisitions. It said it expects a net debt to Ebitda ratio of about 1.5 in 2020.

Nestle said that if it makes a “sizeable” acquisition, it may modify the buyback plan. The company bought Pfizer Inc.’s Wyeth baby nutrition unit for almost $12 billion in 2012, Gerber Baby Foods in 2007 for $5.5 billion and the remainder of its Galderma joint venture with L’Oreal SA for $4.3 billion in 2014.

“It has taken Mark Schneider less than six months to come up with a plan,” said Jean-Philippe Bertschy, an analyst at Bank Vontobel AG. “We believe this is only the tip of the iceberg. The announcement should convince investors who thought it would take time to shake things up in Vevey.”

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