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Loeb's Third Point Calls for Faster Changes at Nestle in Letter

  • Activist renews calls for sale of L’Oreal stake, other changes
  • Third Point returned 18.1 percent on its flagship fund in 2017

Dan Loeb’s Third Point is urging Nestle SA to buy back more of its shares and accelerate portfolio changes at the company to better align with its strategy, including renewing a call for the company to sell its stake in L’Oreal.

Loeb credited Mark Schneider, Nestle’s chief executive, with taking several important steps in his first year at the helm, including setting more aggressive sales and margin targets and announcing a 20 billion Swiss franc share buyback.

"These actions are important steps in the right direction that make it clear that Nestlé is responding to calls for action," Loeb’s Third Point said in a letter to investors Monday. "While we recognize that Nestlé has certain unique cultural and structural constraints, we hope now that Dr. Schneider has completed his first year and there is new blood on the board, the company is able to move with greater alacrity."

Third Point also called for a "thoughtful review" of the company’s financial stake in L’Oreal.

"While the investment, made in 1974, has produced excellent returns historically, that alone is not a sufficient reason to maintain the status quo. Today, it is simply unclear how owning a minority stake in a beauty business makes Nestlé a stronger ‘nutrition, health, and wellness’ company," the letter said.

Ice Cream, Pizza

Third Point said Nestle needs to clarify why it continues to have products like ice cream and frozen pizza that don’t fit the the broader corporate strategy either, and said its foray into "skin health" also seems unrelated to its core business and should be unwound. The hedge fund said the company needs to instead move faster into high-growth categories, like coffee, pet care, water and nutrition.

"We would also like Nestlé to better explain to shareholders the rationale behind expanding further into consumer health care. The recent acquisition of Atrium Innovations (a Canadian vitamin maker) and rumors that the company is bidding on larger assets in this category have left some shareholders confused," Third Point said in the letter.

In its push for the company to accelerate and expand its share buyback program, the hedge fund said: "Shares remain attractively priced relative to what the company could earn in 2020 and beyond. If management is as confident as we are in its ability to execute, then it should move quickly to retire shares now."

Shorting Opportunities

Loeb’s Third Point disclosed a $3.5 billion position in Nestle in June and began pushing for changes at the company.

In addition to the commentary on Nestle, Third Point reported net returns of 18.1 percent on its flagship offshore fund in 2017. Hedge funds broadly returned 6.5 percent on average last year, according to Hedge Fund Research while the Standard & Poor’s Index of 500 U.S. companies jumped 19 percent.

Looking forward, Third Point said it’s bullish on shorting stocks in 2018.

The firm sees "abundant opportunity" to bet against companies this year and beyond, after a prolonged period of low interest rates that has likely created excess capacity across many industries and that will have “unintended consequences for companies’ pricing power and margins.”

Loeb added that his hedge fund, which has a team that focuses on betting against securities or short-selling, has increased its focus on short sales over the past two years.

— With assistance by Saijel Kishan

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