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Nestle plans $10 billion revamp as activist Dan Loeb takes aim

LiveMint logoLiveMint 26-09-2017 Corinne Gretler

Geneva: Nestle SA may buy or sell businesses with combined sales of almost 10 billion francs ($10 billion) as chief executive officer Mark Schneider embarks on the biggest overhaul of the world’s largest food company in at least a decade.

Selective acquisitions and divestments could affect about 10% of total revenue, Schneider told investors as he unveiled his new strategy to investors at a conference in London on Tuesday. Nestle, which has about 90 billion francs in sales, aims to focus on faster-growing businesses such as coffee, bottled water and pet care as the company tries to sell its US chocolate business in its first major retreat from sugary snacks.

“We’ll need to trade out of some product areas and into others,” Schneider said. “We’ll act decisively, and the US confectionery is a good example of that.”

For the first time, the Swiss owner of Nespresso coffee and Perrier water set a fixed profitability target, aiming for an underlying trading margin in 2020 that’s as much as 2.5% points higher than what it achieved last year. That’s still shy of the level sought by activist investor Dan Loeb, whose hedge fund firm Third Point bought a $3.5 billion stake in Nestle earlier this year.

Loeb declined to comment on Nestle’s plans. The shares traded 0.9% higher as of 11:12 a.m. in Zurich.

“The target is certainly attainable,” said Jean-Philippe Bertschy, an analyst at Bank Vontobel AG. “While it will please some investors, others -- like Loeb -- may be a bit disappointed.”

Nestle’s adoption of a profit target marks a broader shift among the world’s biggest food companies, after decades of prioritizing scale. Now, with many of their mass-market brands facing skepticism from consumers seeking healthier and hipper alternatives, sales growth is slowing and consumer-goods giants are under pressure from investors to cut costs and to move into more profitable niches.

The CEO already announced a share buyback worth as much as 20 billion francs ($21 billion), the planned disposal of Nestle’s US confectionery unit and acquisitions of coffee and fresh-food businesses. The company has also been cutting jobs at its skincare unit.

Schneider said Nestle isn’t immediately changing its stance on its stake in French cosmetics maker L’Oreal SA, which he described as a “fabulous” investment, contributing 9% of the Swiss company’s earnings per share over the past decade. The death of L’Oreal heiress Liliane Bettencourt last week prompted speculation about the future of Nestle’s 23% holding in the French cosmetics company.

Gerber, Yinlu

Nestle plans to keep its US frozen unit, and the ailing skin-health business has a strategic fit, according to the CEO. He also said the company is trying to revamp its Gerber baby nutrition division in the US and Yinlu food in China.

Nestle has faced calls for a shakeup from Third Point, whose stake is equal to about 1%, while rival Unilever fended off a takeover bid earlier this year from Kraft Heinz Co., backed by buyout firm 3G Capital Partners.

Unilever is targeting an underlying operating margin of 20% by 2020, while Danone aims to exceed 16 percent that year. That compares with Nestle’s new goal for an underlying trading margin of 17.5% to 18.5% by 2020.

Last year Nestle announced plans to improve its margin by at least 2% points by 2019 or 2020 through cost savings. The Nescafe maker’s unadjusted trading operating margin has hovered between 15% and 15.3% during the past six years.

In July, Schneider said Nestle may expand restructuring beyond its original plan. The company, which had 328,000 employees in 2016, has forecast reorganization costs will rise about 67% to 500 million francs this year.

“Virtually all of you underestimate the will to win at this company,” Schneider said. “It’s hell-bent on not losing its leadership position.” Bloomberg

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