Dan Loeb Scores A Quick Victory: Nestle Announces CHF20 Billion Stock Buyback

Two days after Dan Loeb announced he had acquired a $3.5 billion position in the world"s biggest food company, Nestle, making him the 6th largest holder, and going activist with a list of demands including 1) Improving Productivity; 2) Returning Capital to Shareholders; 3) Re-shaping the Portfolio; and, 4) Monetizing its L’Oréal Stake, moments ago the company responded by effectively conceding on day 2 of the activist campaign, announcing a plan to buyback CHF20 billion in shares by the end of June 2020, and added that in the future "capital spending will be focused particularly on advancing high-growth food and beverage categories such as coffee, petcare, infant nutrition and bottled water,"

On the buyback, Nestle said that "in the context of low interest rates and strong cash flow generation, share buybacks offer a viable option to create shareholder value. Therefore, as a result of its review, the Board of Directors approved a share buyback program of up to CHF 20 billion, to be completed by the end of June 2020. Should any sizeable acquisitions take place during this period, the share buyback program will be adapted accordingly.

The program is scheduled to start on 4 July 2017. The volume of monthly share buybacks will depend on market conditions but is likely to be backloaded in 2019 and 2020 to allow the pursuit of value-creating acquisition opportunities. Based on current projections, the company expects a net debt to EBITDA ratio of circa 1.5 in 2020.

Additionally, Nestle said that "in line with the company’s nutrition, health and wellness strategy, it will also pursue growth opportunities in consumer healthcare. Consistent with a disciplined approach to acquisitions, Nestlé will only prioritise external growth opportunities that fit within targeted categories and geographies, deliver attractive returns, and build on the company’s leadership position in fast growing food and beverage categories."

Nestlé’s recent announcement that it would explore strategic options for its US confectionery business is consistent with this overall approach. The company will continue to adjust its portfolio in line with its strategy and growth objectives.

Nestlé will also continue to assess opportunities for margin improvement through targeted efficiency programs that do not undermine the company’s performance in attractive long-term growth categories.

The stock, after spiking on Monday, was delighted with the activist investor winning so early in the campaign and rose some more.

Dan Loeb Is Now Nestle's 6th Largest Shareholder; Goes Activist On World's Biggest Food Company

Dan Loeb has returned to his earthshaking activist roots, and in a letter released moments ago, Third Point announced it is now targeting the world’s largest food company, with its biggest bet on a public company in its history, amounting to $3.5 billion.

In the letter, Third Point announced that it currently owns roughly 40 million shares of Nestle, and that its stake, which is held in a special purpose vehicle raised for this opportunity including options, currently amounts to over $3.5 billion. Putting this number in the context of Nestle"s market cap of $264 billion, Loeb may have an uphill battle though that never stopped him before.

Loeb"s stake of 40 million shares makes him the 6th largest holder of Nestle, above Credit Suisse Asset Management with 38 million shares and below Massachusetts Financial Services Company with 56.8 million. The Top 4 holders are BlackRock, CapRe, Norges Bank, and Vanguard.

Third Point writes that "despite having arguably the best positioned portfolio in the consumer packaged goods industry, Nestlé shares have significantly underperformed most of their US and European consumer staples peers on a three year, five year, and ten year total shareholder return basis. One year returns have been driven largely by the market’s anticipation that with a newly appointed CEO, Nestlé will improve."

While the problems are clear, why did Third Point go activist? To maximize value of course, as It explains:

Third Point invested in Nestlé because we recognized a familiar set of conditions that make it ripe for improvement and change: a conglomerate with unrealized potential for margin improvement and innovation in its core businesses, an unoptimized balance sheet, a number of non-core assets, and a recent history of meaningful under-performance versus peers. It is rare to find a business of Nestlé’s quality with so many avenues for improvement.

As to how it could achieve this, Third Point lays out 4 specifics recommendations:

Third Point intends to play a constructive role to encourage management to pursue change with a greater sense of urgency. We have offered our views in productive conversations with management, which we expect will continue. We believe Nestlé is positioned to create enormous value for shareholders over the next several years if the company focuses on: 1) Improving Productivity; 2) Returning Capital to Shareholders; 3) Re-shaping the Portfolio; and, 4) Monetizing its L’Oréal Stake. We discuss each of these in more detail below.

Loeb"s conclusion:

As demonstrated by our significant capital commitment, we are enthusiastic about Nestlé’s prospects. The situation reminds us of similar conditions that existed when we first invested in Baxter in 2015. Some market observers scratched their heads, as they thought the company looked “expensive” and thus underestimated the uplift that is possible when a new leader dedicates himself to better capital allocation, portfolio optimization, and margin improvement with strong shareholder support.

We recognize that even with new leadership and clear options for value creation, change at a company like Nestlé can be complex. It is for this reason that Third Point intends to be an engaged, long-term shareholder and offer our assistance to the management team and Board as they pursue improved performance for all stakeholders. We are confident that by following the path we have outlined, Nestlé will be able to revive its iconic slogan, with a twist: Nestlé makes the very best returns for its shareholders.

For the full breakdown of Loeb"s recommendations, see the full letter below.

As Bloomberg notes, the Third Point move comes as Nestle’s new Chief Executive Officer Mark Schneider aims to boost the company’s health strategy as well as focus on the businesses that are growing fastest, such as coffee and pet food. Food companies are under pressure to reduce costs after Kraft Heinz Co.’s unsuccessful bid for Unilever earlier this year showed that even the largest players could become targets.

Chocolate makers especially are grappling with weak U.S. consumption as Americans increasingly turn their backs on sugar. Nestle said this month it may sell its U.S. sweets unit, which includes brands such as Butterfinger and BabyRuth.

Third Point has targeted European companies before. Vitamin maker Royal DSM NV also attracted the activist, and went on to sell its majority stake in a basic plastics and resins unit to CVC Capital Partners after facing calls to break up.

Full Third Point letter below (pdf link)