Nestlé/water: tapped out
The Swiss company may struggle to find a buyer for its North American bottled water business
Bottled water no longer quenches Nestlé’s thirst for growth. The Swiss food company is mulling a sale of its North American mass-market bottled water business. It may struggle to find a buyer.
True, Americans’ love affair with bottled water is still going strong. More than $18bn was spent in 2018, according to the International Bottled Water Association.
But Nestlé’s US water brands Poland Spring, Deer Park and Pure Life compete at the bottom end of the market in a category dominated by discount private labels and Coca-Cola’s Dasani. It has been too slow to move into flavoured, sparkling water, where brands such as LaCroix have enjoyed fast growth. The result: Nestlé’s global bottled water business eked out just 0.2 per cent in organic growth last year. While the unit boasts an operating profit margin of 11.8 per cent, the bulk of this comes from higher-priced brands such as Perrier and S. Pellegrino.
Since taking the helm in 2017, boss Mark Schneider has been aggressively weeding out underperforming assets such as lunchmeat and candy. Now he is looking at water.
Will Coca-Cola and PepsiCo bite? Unlikely. Both companies already have a sizeable presence in the US bottled water market. Buying Nestlé’s unit could draw regulatory scrutiny. Danone, the French group behind the iconic Evian brand, has little US presence. It may be a contender. But it has also been struggling with stagnant water sales. It makes little sense for the company to double down on the low-end of the water market. Especially since there is little synergy or costs savings to be found in combining the two.
That leaves buyout groups as Nestlé’s best hope. Private equity has plenty of dry powder. The trouble is the bottled water business’s low return on capital. Analysts at Jefferies estimate RoE was about 24 per cent excluding goodwill in 2018 and 17 per cent including it.
The sale is a long time coming. But finding a prospective buyer for a low-margin, no-growth business such as bottled water at a time of intense consumer backlash against plastic waste is going to be difficult.
Gapping down
In reaction to disappointing earnings/guidance:
- LULU -3.3%, PVH -2.3%
Other news:
- WINS -10% (co states it is not aware of any material corporate developments that could account for this unusual trading activity)
- OKE -6.5% (prices offering of 26 mln shares of its common stock at $32.00 per share)
- VXX -4.8% (lower with US futures rebounding)
- SITM -2.3% (prices follow-on offering of 3,500,000 shares of its common stock at $32.00 per share)
- FPI -1.7% (provides update on "short-and-distort" litigation)
Gapping up
In reaction to strong earnings/guidance:
- PRTY +27.5%, FCEL +20.8%, PLAY +12.9%, CNC +5.4%, ADBE +4.2%
Other news:
- LPTX +20.6% (receives Oprhan Drug Designation of DKN-01)
- TGI +17.8% (files for $600 mln mixed securities shelf offering)
- RWT +14.5% (rebounding following yesterday's sell off)
- EDIT +11.5% (presents pre-clinical data from a Study of EDIT-301)
- APTO +9.6% (announced that new clinical data on CG-806 was presented in a poster presentation today at the EHA25 Virtual Congress)
- CWH +9.5% (CEO disclosed the purchase of 23.5K shares worth ~$500K)
- JBLU +9.1% (Moody's downgrades senior secured ratings to Ba2)
- AGIO +7.9% (Royalty Pharma acquires rights to Agios' royalty on IDHIFA)
- GNUS +6.4% (announced that its previously filed registration statement on Form S-3, which registers the resale of shares of common stock underlying warrants, was declared effective by the SEC on June 10, 2020)
- BLUE +6.1% (following presentations at EHA Conf)
- QDEL +4.8% (receives BARDA funding to develop point-of-care diagnostic assay that includes COVID-19)
- MYL +3.1% (Mylan N.V. and Biocon receive FDA approval of Semglee)
- VIE +3% (FDA approves Uplizna for NMOSD in adult patients with a particular antibody)
- NVAX +2.5% (details DoD contract)
- LMT +2.1% (awarded $370 mln Navy contract)
Analyst comments:
- PLAY +12.9% (upgraded to Buy from Hold at SunTrust)
- LUV +7.8% (upgraded to Outperform from Neutral at Credit Suisse)
- TTWO +2.3% (upgraded to Buy from Neutral at MKM Partners)
Early premarket gappers
- Gapping up:
- LPTX +23.9%, PLAY +15.2%, RWT +13.4%, PRTY +12%, GNUS +11.3%, JBLU +7.1%, VIE +6.6%, SELB +5.7%, TGI +5.6%, ADBE +4.5%, EDIT +4.4%, MYL +3.5%, CNC +3.5%, BLUE +3%, NVAX +2.9%, LMT +2.3%, QDEL +2.2%
- Gapping down:
- WINS -31.4%, AGIO -9.8%, VXX -7.6%, OKE -5.7%, PVH -5.2%, LULU -4.5%, SITM -2.3%, FPI -1.7%, CIR -1.6%
Activist investor Cevian takes stake in Pearson
Swedish group bets on potential for new management to turn round struggling education group
Europe’s biggest activist investor has built a significant stake in Pearson, betting on the potential for new management to turn round the struggling education group.
Cevian Capital, the Swedish investor that has previously targeted companies such as Thyssenkrupp and Nordea, bought 5.4 per cent of Pearson and said on Friday it expected a new chief executive to realise the company’s “full potential”.
Pearson, which is undergoing a painful transition towards digital products and services, has endured six profit warnings under its longtime chief executive John Fallon. He has previously announced his departure from the company but a successor has yet to be appointed.
Shares in Pearson jumped 11.6 per cent to £5.72 after news of the Cevian stake emerged.
Christer Gardell, co-founder of Cevian, said he had “followed Pearson closely for several years”.
“The company has a collection of leading businesses in attractive markets, but several of these businesses have yet to deliver on their full potential,” he said in a statement. “Based on our analysis, we see no reason Pearson’s businesses shouldn’t outperform their competitors, and produce attractive, growing and predictable returns.”
He called for the appointment of a chief executive “with a clear track record of shareholder-value creation”.
Describing itself as an “engaged” shareholder rather than an activist, Cevian has taken stakes in European companies from Ericsson and Volvo Group to ABB, often seeking board appointments. Its chairman is Paul Myners, the Labour peer and former Treasury minister.
Since widespread lockdowns began Pearson has sought to stress the promise of its online learning products, a line of business that is an increasing focus for the company as it moves away from the lacklustre US market for textbooks.
“We think Pearson has a compelling set of assets exposed to a very interesting and dynamic global sector while also enjoying a strong balance sheet,” said Thomas Singlehurst, analyst at Citi.
“The standalone investment case is sadly, however, largely overlooked by an overwhelmingly bearish consensus. It is not clear what direction an activist investor will take Pearson, but we do see significant value and its very presence could be a positive catalyst to realising this,” he said.