TheChek News Flow

Nestlé U.S. Chief Looks for Brands to Fix or Toss

Number of Product Variations Is Slashed, Lean Cuisine Gets a Makeover

BOSTON—When Paul Grimwood took over Nestlé SA NESN.VX +0.29% 's struggling U.S. operations a year and a half ago, he faced an unlikely problem: Hair nets.

Nestlé's seven independent businesses in the U.S., which run a total of 87 factories, were buying hair nets and safety shoes from more than 100 suppliers. Because the units weren't talking with each other, Nestlé, the world's biggest food company, couldn't get the best bulk discounts in its biggest national market. Now Nestlé says it uses just "a handful" of suppliers.

The same thing happened with flavorings. By combining purchasing departments across businesses, he chopped the number of flavor suppliers in the U.S. to four from 48.

"If you keep rolling that out across the scale and size of the whole U.S. market, it makes a phenomenal difference to the profitability," Mr. Grimwood said in a recent interview.

Nestlé is counting on the 51-year-old Englishman to fix its sagging U.S. business, which accounts for about a quarter of its 92.16 billion Swiss francs ($103.37 billion) in sales but has slowed to a near standstill.

Beyond hair nets and flavorings, he must deal with a sprawling hodgepodge of brands in the U.S., some of which are languishing. Oh Henry and 100 Grand candy bars are long past their heyday, market share for Juicy Juice children's fruit drinks has declined for years, and Ovaltine, the chocolate malted-milk powder that first arrived in the U.S. market around a century ago, no longer bothers to run TV ads in the U.S.

Since arriving, Mr. Grimwood has slashed the number of Nestlé's product variations, such as flavor or size, by 43% to simplify operations. Dropping the calzone version of Hot Pockets and the quesadillas Lean Pockets, for example, reduced the types of dough it has to make.

Nestlé also has begun shedding businesses that no longer fit its strategy or are in weak categories. It sold most of the Jenny Craig diet business in November and PowerBar athletic snack brand in February. Mr. Grimwood said "there may be one or two more brands in the portfolio we release in due course."

In a recent interview, Paul Bulcke, Nestlé's chief executive, acknowledged the U.S. operations needed a shake-up. Mr. Grimwood, he said, is the man "to establish who we are in the U.S."

Mr. Grimwood spent a decade at candy maker Mars Inc. before moving to Highland Distillers, a Scotch whisky maker. In 2001, he joined Nestlé's Purina PetCare business and then moved to the candy operations before taking over Nestlé's entire U.K. and Ireland business. In October 2012, he was sent to Nestlé's U.S. headquarters in Glendale, Calif.

Mr. Grimwood's next target will be frozen food, Nestlé's second-biggest category in the U.S., after pet food. Like other food companies, Nestlé has been hit by a rapid shift away from frozen meals, as consumers gravitate to fresh foods that they think are healthier. Many of its frozen brands, like Lean Cuisine and Hot Pockets, have lost relevance with consumers.

Operating profit for Nestlé's U.S. frozen business has fallen an average of 7% annually over the past three years, but would have risen 4% a year if Lean Cuisine were stripped out, according to the company.

Mr. Grimwood said Lean Cuisine is in Nestlé's "fix box." Nestlé has begun to reposition Lean Cuisine—a pioneer in the diet food segment that suffered from rising competition and shifting tastes—to appeal to people pursuing healthy lifestyles rather than weight loss. While the brand isn't as big as it once was, Lean Cuisine still generates nearly $1 billion in annual sales.

"Once we fix it, then we'll see what the next strategic steps are," Mr. Grimwood said. The same sentiment applies to Juicy Juice, which until a few years ago was losing money.

Another priority is ice cream, a Nestlé staple that has been losing market share to cheaper store brands. Banking on innovation, Nestlé last year came out with Haagen-Dazs gelato and Edy's and Dreyer's branded coconut water frozen fruit bars to try to tap in to the trends. And Butterfinger cups, a line extension of a classic candy, has boosted the Butterfinger base business by 49% from January to May.

"Nestlé has some serious work cut out for them," said Thomas Russo, who oversees a stake in Nestlé valued at about $1 billion at Gardner Russo & Gardner LLC, a U.S. advisory firm in Lancaster, Pa. He said some of Nestlé's brands had "been starved of investment."

"You can't make everything a priority," Mr. Grimwood said, referring to brands like Ovaltine, 100 Grand and others that have a following but aren't going to be sales engines.

Some of Nestlé's U.S. businesses are thriving. The Purina PetCare business, which represents about a quarter of all Nestlé sales in the U.S., has been growing 4% a year in North America. Its candy business has also staged a turnaround in recent years, after being unprofitable for years.

Nestlé also expects high-margin revenue to rise after acquiring the North American rights to a handful of skin-care products it will sell through Galderma, its dermatology business. The U.S. and Canada represent more than half the global market for medical aesthetic treatments.

"Our portfolio will always change and move," Mr. Grimwood said. "We're prepared to fix issues that we have, and if we can't fix them, divest."

SPAIN JUN MANUFACTURING PMI: 54.6 V 53.0E (7th straight month of expansion and highest since June 2007) 

- Employment: 53.0 v 50.2 prior; 7-year high 

- New Orders: 56.3 v 53.4; highest since Apr 2007

What is your feeling about the global economy?

The European economy is likely out of recession and shows moderate growth, which is a real plus. The risk of a sovereign debt crisis, the greatest fear of 2011 is very far: financing is readily available and yields on government bonds are much lower. In the United States, growth recovers and the economy seems in good condition. More generally, Western economies are not robust but growing at a modest pace, and this is what they probably got better since the last recession. Thus, the environment is more favorable, especially if you add generalized low rate (companies ...) and U.S. stocks are at their highest. I do not foresee any major risks in the markets.

What is the impact of the environment on your Arbitration M & A strategy?

Companies can now borrow at low rates and issue shares, which is "accretive" (1) for the companies that are buying. Therefore, it is not surprising that there are a lot of merger and acquisition. In general, the merger is "accretive" and strategic. The earnings per share of the predator grow faster thanks to the acquisition of the target. I must say that this is one of the best times of my career for the arbitrage strategy of mergers and acquisitions because it is one of the best periods for companies to grow through acquisitions. There has been bad in the past mergers, but this is less the case today. The risk of these operations depends on several factors, especially regulatory and policy aspects (the influence of government on the outcome of a takeover) and the component of funding the redemption.

You now have fewer competitors on this strategy. What for?

This activity within banks has been significantly reduced as a result of the Volcker Act [Editor's note: rule designed to limit speculative activity of banks]. Funds specializing in this strategy were in turn severely penalized by the failure of certain operations such as Hillshire Pinnacle-and-Pfizer, AstraZeneca, who have lost their money. But if the difference between the price desired by the buyer and the share price increases - the "spread" (2) - it should attract new players in the market. One must keep in mind that this "spread" is the maximum gain that you can get if all goes well. But if this is not the case, you are exposed to heavy losses. When you are working on transactions whose terms are announced, you must be right in 95% of cases to make money because the "spread" is very low compared to the risk of loss. When, however, you buy shares in anticipation of redemption, it is not necessary to be right all the time.

Do you expect a continuation of mergers?

Yes, because it occurs in a favorable corporate earnings context, and that these buybacks are strategic and "accretive". Companies are stronger as a result of these comparisons. Tax considerations could explain certain acquisitions of foreign companies by U.S. groups, but the tax is not the key determinant of the transactions between the two continents. In the future, we expect a wave of consolidation among independent U.S. oil producers in telecoms in Europe or in the health sector.

What is your opinion on activism?

Our fund is certainly not an activist. In general, we like to work with companies. We do not like to be their opponents. This succeeds we better financially when we are friendly rather than hostile. Activists can be beneficial to shareholders, as in Allergan-Valeant operation.

How do you see your "hedge fund" in the coming years?

Compared to "hedge funds" with assets of the same order, we are a small 'agile' shop with 126 employees, including nearly half dedicated to investment, and a very low turnover of our workforce. We are satisfied with this organization. We have a fairly comprehensive range of strategies (mergers and acquisitions, credit ...) and want to remain focused on our historical expertise. The United States and Europe are the two areas in which we operate exclusively. We are not yet in Asia, but we will in the future. This is a very attractive area, but also very demanding, you need to allocate a lot of resources to meet success.

How do you explain the many failures of young "hedge funds"? What are the qualities to succeed?

"Hedge funds" are supposed to provide investors with consistent, low volatility and low correlation to other markets returns while managing their risks well. It is very hard to meet all these requirements, especially for inexperienced managers. It is very easy to launch a "hedge fund" but very difficult to last in this business. You must be insightful, dedicated 100% to your funds, humble, patient and show independence of mind. Few managers have all these qualities. Unlike mergers in the industrial world, reconciliations between "hedge funds" do not make much sense because of the difficulties to reconcile and to cohabit individuals, cultures and different investment process. I am very independent and could not work for a shareholder who has a say on how I manage my funds. If I were to launch a new "hedge fund" today, I would do it the same way that there twenty years.

Quel est votre sentiment sur l'économie mondiale ?

L'économie européenne est vraisemblablement sortie de la récession et affiche une croissance modérée, ce qui est un véritable plus. Le risque d'une crise de la dette souveraine, la grande peur de 2011, s'est bien éloigné : le financement est facilement disponible et les rendements des obligations d'Etat sont bien plus bas. Aux Etats-Unis, la croissance repart et l'économie paraît dans un bon état. Plus généralement, les économies occidentales ne sont pas robustes mais progressent à un rythme modeste, et c'est ce qui leur est sans doute arrivé de mieux depuis la dernière récession. Ainsi, l'environnement est plutôt favorable, notamment si vous y ajoutez des taux bas généralisés (entreprises…) et des actions américaines qui sont à leur plus haut. Je ne prévois pas de risques majeurs sur les marchés.

Quel impact de l'environnement sur votre stratégie d'arbitrage de fusions-acquisitions ?

Les entreprises peuvent en ce moment emprunter à des taux bas et émettre des actions, ce qui est « relutif » (1) pour les sociétés qui les rachètent. Par conséquent, il n'est pas surprenant qu'il y ait beaucoup d'opérations de fusion-acquisition. De façon générale, la fusion est « relutive » et stratégique. Le bénéfice par action du prédateur progressera plus vite grâce au rachat de sa cible. Je dois dire que c'est une des meilleures périodes de ma carrière pour la stratégie d'arbitrage de fusions-acquisitions car c'est une des meilleures périodes pour les sociétés pour croître par acquisitions. Il y a eu par le passé de mauvaises fusions, mais c'est moins le cas aujourd'hui. Le risque de ces opérations dépend de plusieurs facteurs, particulièrement les aspects réglementaires et politiques (l'influence d'un gouvernement sur l'issue d'un rachat), et le volet du financement du rachat.

Vous avez aujourd'hui moins de concurrents sur cette stratégie. Pourquoi ?

Cette activité au sein des banques a été considérablement réduite à la suite de la loi Volcker [NDLR : règle qui vise à limiter l'activité spéculative des banques]. Les fonds spécialisés dans cette stratégie ont été de leur côté durement pénalisés par l'échec de certaines opérations telles que Hillshire-Pinnacle et Pfizer-AstraZeneca, qui leur ont fait perdre de l'argent. Mais si l'écart entre le prix voulu par l'acquéreur et le cours de l'action s'accroît - le « spread » (2) -, cela devrait attirer de nouveaux acteurs dans le marché. Il faut garder à l'esprit que ce « spread » est le gain maximum que vous pouvez obtenir si tout va bien. Mais, si ce n'est pas le cas, vous êtes exposés à de lourdes pertes. Quand vous intervenez sur des opérations dont les termes sont annoncés, vous devez avoir raison dans 95 % des cas pour gagner de l'argent car le « spread » est très faible au regard du risque de perte. Quand, en revanche, vous achetez des actions en anticipant leur rachat, il n'est pas nécessaire d'avoir raison tout le temps.

Vous attendez-vous à une poursuite des fusions ?

Oui, car elle se produit dans un contexte favorable pour les résultats des entreprises, et que ces opérations de rachat sont stratégiques et « relutives ». Les sociétés sont plus fortes à la suite de ces rapprochements. Des considérations fiscales ont pu expliquer certaines acquisitions de sociétés étrangères par des groupes américains, mais la fiscalité n'est pas le déterminant essentiel de ces opérations entre les deux continents. A l'avenir, nous anticipons un mouvement de consolidation parmi les producteurs de pétrole américains indépendants, dans les télécoms en Europe ou dans le secteur de la santé.

Quelle est votre opinion sur l'activisme ?

Notre fonds n'est assurément pas un activiste. En règle générale, nous apprécions de travailler en collaboration avec les entreprises. Nous n'aimons pas être leurs adversaires. Cela nous réussit mieux financièrement quand nous sommes amicaux plutôt qu'hostiles. Les activistes peuvent être bénéfiques aux actionnaires, comme dans l'opération Allergan-Valeant.

Comment voyez-vous votre « hedge fund » dans les années à venir ?

Comparé aux « hedge funds » disposant d'actifs du même ordre, nous sommes une petite boutique « agile » avec 126 collaborateurs, dont près de la moitié dédiés à l'investissement, et un très faible taux de rotation de nos effectifs. Nous sommes satisfaits de cette organisation. Nous disposons d'une gamme de stratégies assez complète (fusions-acquisitions, crédit…) et souhaitons rester focalisés sur nos expertises historiques. Les Etats-Unis et l'Europe sont les deux zones sur lesquelles nous opérons exclusivement. Nous ne sommes pas encore présents en Asie, mais nous le serons à l'avenir. C'est une zone très attrayante, mais aussi très exigeante, où vous devez allouer beaucoup de ressources pour rencontrer le succès.

Comment expliquez-vous les nombreux échecs des jeunes « hedge funds » ? Quelles sont les qualités pour réussir ?

Les « hedge funds » sont supposés offrir aux investisseurs des rendements constants, peu volatils et peu corrélés aux autres marchés, tout en gérant bien leurs risques. Il est très dur de répondre à toutes ces exigences, notamment pour les gérants peu expérimentés. Il est très facile de lancer un « hedge fund » mais très difficile de durer dans ce métier. Vous devez être perspicace, dédié à 100 % à votre fonds, humble, patient et faire preuve d'indépendance d'esprit. Peu de gestionnaires disposent de toutes ces qualités. Contrairement aux fusions dans le monde industriel, les rapprochements entre deux « hedge funds » ne font pas beaucoup sens à cause des difficultés à rapprocher et à faire cohabiter des individus, cultures et processus d'investissement différents. Je suis très indépendant et ne pourrais pas travailler pour un actionnaire qui a son mot à dire sur la façon dont je gère mon fonds. Si je devais lancer un nouveau « hedge fund » aujourd'hui, je procéderais de la même manière qu'il y a vingt ans.

Company will close in on production goal in two years

Selling Canadian assets this year

Next equity raise likely in 12-18 months

Abraxas Petroleum (Nasdaq: AXAS) will likely become a takeover target when it reaches production of about 10,000 barrels a day, anticipated in about two years, Chairman and CEO Bob Watson said.

At that point, “Abraxas would start to look attractive as an acquisition target,” Watson told this news service following his presentation at the IPAA’s Oil and Gas Investor Symposium in Toronto.

Reaching that level of production would make the San Antonio-based Abraxas a “billion-dollar market cap” company. Its current market capitalization is around USD 650m.

After selling approximately USD 200m in noncore assets over the last two years, Abraxas has 10,000 net acres in the Eagle Ford in south Texas and 5,000 acres in the Williston Basin formation of the Bakken play in North Dakota and Montana. It also has assets in the West Texas Permian Basin and Wyoming's Power River Basin as well as in the Duvernay play in central Alberta.

Abraxas announced earlier this month a USD 25m increase to the company’s 2014 capital budget to USD 190m, which will go directly to maintaining a one-rig program for the remainder of 2014 in the Eagle Ford play. This will boost the company’s average daily production to between 5,800 and 6,000 barrels of oil, and a targeted exit rate of 8,000 barrels per day. That’s up from the current level of about 4,200 barrels per day.

To help pay for this expansion, the company recently closed on an offering of 10m shares priced at USD 5, for net proceeds of about USD 47m. Stephens Inc., Canaccord Genuity Inc. and Robert W. Baird & Co. Inc. acted as joint book-runners in the offering.

Abraxas aims to add a second rig for the Eagle Ford play to its capital plans, Watson said, possibly next year, which would bring its expected level of production up to 10,000 barrels a day by end of 2016. “Giving this sort of guidance for the next two years is new to Abraxas, but we feel very comfortable with that number.”

Watson said larger companies who want to either get a foothold in the Eagle Ford or Bakken, or which would like to increase their existing positions in these areas, would likely be interested in acquiring a smaller, focused independent such as Abraxas, which generates a “great rate of return on relatively small acreage”.

Among possible candidates are EOG (NYSE:EOG) and SM Energy (NYSE:SM), larger players active in both the Bakken and Eagle Ford, Watson said.

Alberta assets for sale

Abraxas plans to sell its assets in Alberta, Canada, this year, with marketing efforts to begin by the end of August, Watson said.

Abraxas has about 25,000 net acres in the region and about 60-80 barrels of oil per day in production. Its targets are primarily horizontal drilling opportunities targeting the Duvernay, Pekisko, Nisku and Nordegg areas of central Alberta.

The company is not spending to further develop the Canadian assets this year, Watson said, while noting regulatory issues in Alberta and Canada added to the decision to attempt a Canadian sale.

"Theoretically we are ready to sell now, but our sales agent suggested we wait until the end of summer to increase potential interest.”

Sayer Energy Advisors is acting as marketing agents in selling the Canadian assets.

Abraxas also intents to sell its Canadian corporate entity, called Canadian Abraxas Petroleum. As a result, Watson said, there might be interest from companies which would be interested in the associated tax pools of about CAD 60m.

Watson said a potential buyer, most likely an operator in the region already, could buy Canadian Abraxas for its production value -- perhaps CAD 50,000 to CAD 60,000 for each barrel of daily production. That would net the company somewhere around CAD 5m on that basis alone.

Privately held Forge Petroleum Corporation, Bashaw Oil and Mancal Energy, along with EOG, are just some of the players operating in the area, according to Watson.

Equity more likely to fuel growth

With just more than 100 existing staff, the CEO said Abraxas is capable of executing on a two-rig program and meeting its targets. “Right now we can use our A-team in the field, so they can make those critical decisions,” he said. To add a third rig would require additional investment and staff, Watson said.

He said it costs about USD 84m for each additional rig going, though that outlay is offset by the cash flow the additional production brings in.

While the company recently increased its credit facility to USD 162m from USD 130m, Watson said it is more inclined to raise capital in the future through an equity issue rather than debt.

“We like to keep a conservative balance sheet,” he said, pointing out that Abraxas prefers to have its debt below a multiple of 1x EBITDA.

The company will likely return to the equity markets for more capital within the next year to 18 months, especially if the “markets continue to be frothy” and oil prices stay in the range of USD 100 per barrel.

The company would also like to continue to add bolt-on acquisitions, but Watson acknowledged these would be small buys. “You’re going to find the 400-500 acres, maybe even 1,000 acres of land in the area that would be considered suitable, but you’re not going to find 10,000 acres,” he said. “Also, we’ve shown you don’t need a lot of acreage to get good rates of return on production.”

Watson added he expects to see more smaller holdings come on the market. The big boom in shale plays started in 2008 and 2009, he said, and many of those land tracts with five-year leases will hit their expiry dates.

*ACERINOX RAISED TO NEUTRAL VS UNDERPERFORM AT CREDIT SUISSE

*DAILY MAIL RAISED TO OVERWEIGHT VS EQUALWEIGHT AT BARCLAYS

*DANONE RAISED TO BUY VS HOLD AT KEPLER CHEUVREUX

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