July 2, 2018 / 2:57 PM / 3 months ago

Breakingviews - Dan Loeb hits limits of “constructivism” on Nestlé

LONDON (Reuters Breakingviews) - Dan Loeb is hitting the limits of constructive activism at Nestlé. A year after disclosing he had taken a stake in the Swiss consumer giant, the activist investor has renewed his call to shake up its business and board. Though his ideas make sense, progress has been slow and the stock has lagged. That suggests a more muscular approach is needed.

Different types of chocolate bars are seen in the company supermarket at the Nestle headquarters in Vevey, February 17, 2011. Nestle, the world's biggest food maker, said strong demand in emerging markets would help it offset a steep rise in input costs in 2011 after it beat sales forecasts for 2010. The maker of Nescafe coffee and Gerber baby food said it was well placed to cope with rising commodity prices by making cost savings and pushing up its own prices. REUTERS/Valentin Flauraud

Taking on the $236 billion group in June last year marked a bold step for Loeb, who is best known for his coruscating attacks on complacent American boardrooms. By comparison, his campaign to shape up the maker of Kit Kat chocolate bars and S.Pellegrino bottled water has been restrained.

But frustration is beginning to show. Nestlé stock is down nearly 10 percent since Loeb’s Third Point fund first disclosed a $3.5 billion stake, and has underperformed rivals Unilever and Danone. Despite his helpful nudging, Loeb says the group’s strategy is still “muddled”.

To be fair, Nestlé hasn’t ignored the activist, who manages funds worth $18 billion. New Chief Executive Mark Schneider has announced plans to boost the group’s operating margin, sold out of slow-growing areas like U.S. confectionery and invested in more promising businesses like coffee.

Yet Loeb has a point when he argues that progress has been half-hearted. Nestlé’s target operating margin of 17.5 percent to 18.5 percent is lower than Unilever’s 20 percent. It still holds onto slow-growing businesses like frozen foods, even though these sit outside its core operations of coffee, pet food, nutrition and water.

Loeb wants Nestlé to sell assets that generate up to 15 percent of total revenue - three times more than the group is targeting - and split its business into three units. A 23 percent stake in French cosmetics group L’Oreal should be sold or handed back to investors. Meanwhile the board, which sets strategy, should appoint more people from outside the company, and who know about food.

Other investors probably agree with the thrust of Loeb’s suggestions. The question is whether they would support more aggressive action, such as making changes to Nestlé’s board. With a 1.3 percent stake in the company, Loeb can do little by himself. To move on from his “constructivist” stance, he would need other shareholders to play along.

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