Nestle - Third Point's second swing
(MergerMarket.com)
When activist hedge fund Third Point made its thundering entry into Nestle [VTX:NESN] last year there seemed real appetite for change.
Third Point was pushing for reorganisation opportunities, like a sale of Nestle’s 23.2% stake in L’Oreal [EPA:OR], in some cases already being studied by management.
Prospects for progress looked promising – kicking off with a CHF 20bn buyback – but a year on there are still plenty of points waiting to be ticked off from Third Point’s to-do list.
Nestle’s stand-out move in the year since Third Point took its stake has not been a divestment but, in fact, a big acquisition, which completed yesterday (28 August).
Paying USD 7.2bn to licence Starbucks’ [NYSE:SBUX] foodservice assets looks like a sensible deal, reinforcing Nestle’s position as the world’s number one coffee brand. That fulfils one of Third Point’s key aims: to refocus the business around a few core categories.
Yet Third Point could become restless. Early in July, fund manager Dan Loeb published new material fleshing out arguments for a three-way split of the business across beverages, nutrition and groceries.
A sale of the L’Oreal stake is also long overdue, Loeb said. And on L’Oreal, at least, there does not appear to be much reason to stall. A shareholder agreement between Nestle and the Bettencourt family, which owns 33% of L’Oreal, expired in March 2018 after the death of heiress Liliane Bettencourt in September 2017.
Personal care specialist L’Oreal has signalled a willingness to execute a buyback on Nestle’s stake.
And it has the balance sheet capacity to do so: L’Oreal’s balance sheet was debt-free at 30 June 2018. It also has a 9.5% stake in pharmaceuticals play Sanofi [EPA:SAN] which has a market value of close to EUR 9bn.
Nestle’s stake in L’Oreal is worth around EUR 27bn at market prices. Assuming transactions on Sanofi and with Nestle could be completed smoothly around current levels, L’Oreal would end the process levered about 3x EBITDA.
There’s also a chance the Bettencourt family might be interested in making an offer for Nestle’s stake, given its already large stake, the Flash would argue.
Not all shareholders are on board with Third Point’s plans on L’Oreal. One, spoken to by the Flash, said selling the stake would be a mistake. L’Oreal has been a good long term investment for Nestle, the shareholder said. Total shareholder returns over the past decade have been 12.8% annualised, according to Morningstar data.
Nestle's L'Oreal stake would also probably have to be sold at a discount, the shareholder added.
Even so, the most important barometer of progress for Nestle shareholders is its own stock price: up 17% over the past 12 months. That’s 17% more than European peer Unilever [LON:ULVR] in the midst of its own strategic reorganisation.
There are signs investors may be starting to buy in to Nestle’s plans to build shareholder value. That confidence could evaporate just as quickly if markets start to question Nestle’s commitment to finishing the job Third Point started.