Questions 1 Who is Dan Loeb? What does he want from Nestlé? Why are such demands
ID: 350035 • Letter: Q
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Questions
1 Who is Dan Loeb? What does he want from Nestlé? Why are such demands coming from an investor and not from the CEO?
2. How has Nestlé responded to this stakeholder's demands? On which demands has Nestlé budged and on which one has Nestlé not budged? Why did they not budge on this one issue? What was the rationale given?
3. Which strategic goals has Nestlé set for the coming year? Name at least two! Do these goals conflict with each other? Is there a trade-off? Why?
4 In fact, CEO Mark Schneider actually says his targets are like "going for a run and going for a dive at the same time." Does this mean Nestlé is doing something strategically impossible or inconsistent? If not, why not? What is the key to attaining these strategic goals?
5. Explain the actions of Nestle using the ‘Above Average Rate of Return Concep
Nestlé Cedes Ground to Loeb but Won’t Budge on L’Oreal
Dow Jones Institutional News; New York [New York]26 Sep 2017.
LONDON—Nestlé SA on Tuesday introduced a profit-margin target and said it would accelerate share buybacks amid pressure from activist investor
Dan Loeb, while remaining firm on retaining a stake in cosmetics giant L’Oréal SA.
The consumer-goods company’s strategy has been in the spotlight since Mr. Loeb’s Third Point LLC hedge fund built a 1.3% stake in Nestlé and in June advocated steps to improve its performance, including the sale of its stake in L’Oréal and the setting of a margin target.
Nestlé on Tuesday said it would strive for a trading operating profit margin of 17.5% to 18.5% by 2020 on an “underlying” basis, which among other things strips out one-time charges. Its margin in the first half was 15.8%.
The company also plans to tweak the $20.8 billion share-buyback program it announced in June. It will now purchase shares evenly in each of the three years to 2020, rather than back load them in 2019 and 2020.
Nestlé said about 10% of its portfolio by sales is ripe for a shuffling as it looks to shed slow-growth assets and invest in more promising ventures.
Shares in the company rose 1.8% on Tuesday.
The raft of announcements accompanying a closely watched investor day in London are the latest moves by the Swiss company to improve its performance under a new chief executive and pressure from Mr. Loeb.
Since Mark Schneider took the reins in January, Nestlé has said it would sell its U.S. confectionery armand announced investments in Blue Bottle coffee, food-delivery startup Freshly and plant-protein-based-foods brand Sweet Earth. Mr. Schneider in February also scrapped a key internal sales target, which the company had repeatedly missed.
After Mr. Loeb in June publicly disclosed his $3.5 billion stake in Nestlé and listed his demands, Mr. Schneider announced the share-buyback program and laid out the company’s investment priorities. He said Nestlé will focus on the high-growth areas of petcare, coffee, infant nutrition and bottled water, while also pursuing opportunities in consumer health care.
With Tuesday’s announcement, Nestlé has largely met three of Mr. Loeb’s demands— setting a margin target, launching buybacks and using acquisitions and divestitures to drive growth—but is resisting a fourth.
Mr. Schneider said Nestlé isn’t planning to change its 23.29% stake in L’Oréal, which has been in focus following the death last week of Liliane Bettencourt, heiress to the L’Oréal fortune.
“The investment is not diluting anything,” Mr. Schneider said Tuesday, adding that the L’Oréal stake has delivered a 12% annual return on investment over the 42 years Nestlé has held it. “Our approach to this investment is currently not changing.”
Third Point declined to comment.
RBC analyst James Edwardes Jones said Nestlé’s new margin target was already baked into his estimates, leaving his target price unchanged.
UBS analyst Pinar Ergun was more bullish, saying the targets could prompt analysts to raise consensus expectations for 2020 per-share earnings. “More importantly it is likely to reassure the skeptics that change is under way at Nestlé,” she said.
Nestlé is aiming for mid-single-digit organic sales growth by 2020 even as it tries to improve margins, a balancing act Mr. Schneider described as “going for a run and going for a dive at the same time.”
The company outlined plans to boost sales by fixing underperforming businesses, like its Yinlu peanut milk brand in China, making acquisitions and focusing on its four high-growth businesses.
Nestlé will also further invest in frozen foods, noting that 90% of U.S. households have a microwave and a freezer, making this a big market. It also plans to focus on ready-to-drink cold coffee and out-of-home coffee, Mr. Schneider said, highlighting the opportunity in increase coffee consumption in China, India and Africa.
Meanwhile, Nestlé plans to cut costs in manufacturing, procurement and general and administrative areas, saying it will spend 2.5 billion francs ($2.59 billion) on restructuring between 2016 and 2020 to achieve annual cost savings of between 2 billion and 2.5 billion francs by 2020. To do this, the company will consolidate offices, increase its global buying, close factories and outsource management of its pension fund, among other measures.
Nestlé has also been working to fix problems in its skin-health business, which suffered because of what Mr. Schneider described as “self-inflicted issues” after Nestlé invested aggressively in consumer skin-care products and as patents on prescription products expired. Last week, the company said it was cutting about 400 of the 550 employees at its Galderma skin-care research and development facility in France as it pivots away from topical prescription creams for skin. A global review of the skin-health business is under way.
Explanation / Answer
1 Ans:- Dan Loeb is an activist investor in Nestle. He wants to improve Nestle performance, sale of its stake in L’Oréal and to set a margin target. The CEO has different objectives and strategy to take forward than an investor. Mr. Loeb’s Third Point LLC hedge fund built a 1.3% stake in Nestlé and that is why an investor is raising such demand.
2 Ans:- Nestle has announced the share-buyback program and focus on the high-growth areas of petcare, coffee, infant nutrition and bottled water, while also pursuing opportunities in consumer health care.
Nestlé has largely met stakeholder's three demands— setting a margin target, launching buybacks and using acquisitions and divestitures to drive growth. But Nestlé didn't change its 23.29% stake in L’Oréal because L’Oréal stake has delivered a 12% annual return on investment over the 42 years.
3 Ans:- The strategic goals set by Nestlé is mid-single-digit organic sales growth by 2020 and to improve margins. These goals conflict with each other but company is going to boost sales by fixing underperforming assets, making acquisitions and focussing on high growth businesses.
4 Ans:- This does not mean that Nestle is going to do something strategically impossible but the company would focus on it strength areas and fix weak businesses like peanut milk brand in China and skin-health business. Nestlé also plans to cut costs in manufacturing, procurement and general and administrative areas. The company would further invest in opportunities like frozen food segment and focus on ready-to-drink cold coffee and out-of-home coffee. These are the key to attain strategic objectives.
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