PARIS — Activism has no borders.
Investors looking to shake up companies have made their voices heard louder than ever in the American market. Retailers from Macy’s to J.C. Penney to Hudson’s Bay have been targeted. Now, it appears the quest for value has gotten increasingly global.
The latest firms in the spotlight, L’Oréal and Nestlé, saw their stocks surge Monday after investor Dan Loeb contended that the Swiss conglomerate should pull out of the French beauty giant.
Late on Sunday, his Third Point hedge fund sent a letter to investors saying it now owns about 40 million shares, or 1.25 percent, of Nestlé. Third Point argued for the Vevey, Switzerland-based maker of Kit Kat, Alpo and Gerber baby products, to divest its 23.1 percent holding in L’Oréal, the world’s largest beauty company.
“Despite having arguably the best positioned portfolio in the consumer packaged goods industry, Nestlé shares have significantly underperformed most of their U.S. and European consumer staples peers on a three-year, five-year and 10-year total shareholder return basis,” Third Point wrote. “One-year returns have been driven largely by the market’s anticipation that with a newly appointed ceo, Nestlé will improve.”
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The suggestion was made that Nestlé reshape its portfolio by shedding noncore product categories and its stake in L’Oréal, though it was lauded for being a “superb investment” since a 29 percent stake was taken in the beauty concern in 1974.
“However, having L’Oréal in the portfolio is not strategic and shareholders should be free to choose whether they want to invest in Nestlé or some combination of Nestlé and L’Oréal,” the letter said. “Current conditions make this the right time to exit the remainder and we believe the stake can be monetized with limited tax or other consequences.”
A L’Oréal spokeswoman had no comment on the Third Point-related news.
A Nestlé spokesman said: “As always, we keep an open dialogue with all of our shareholders and we remain committed to executing our strategy and creating long-term shareholder value. Beyond that, we have no specific comment.”
On Monday, L’Oréal stock closed up 3.9 percent to 195.35 euros, and Nestlé stock ended the day having advanced 4.3 percent to 85.65 Swiss francs.
Activist investors have been making their voices heard more than ever in the American market in recent years. Retailers from Macy’s to Target to Hudson’s Bay have been targeted. It appears the quest for value has gone increasingly global.
“A number of investors have commented that it is odd that an investor with just 1.3 percent of the share capital can make so much noise, and have so great an impact on the stock. Our view is that Third Point is just saying — perhaps just louder — what others have been thinking and saying for some time,” wrote Andrew Wood, an analyst at Sanford C. Bernstein & Co. LLC.
“Clearly, investors believe that an activist voice is likely to push Nestlé harder…and we share some of that belief, too,” he continued. “We are not convinced that Nestlé will fully match the desire and commitment to change shown by Unilever and, to a lesser extent, Danone.”
Referring to Nestlé’s chief executive officer since June 2016, Jean-Philippe Bertschy, an analyst at Bank Vontobel, wrote in a note: “We are convinced that Mark Schneider has very ambitious plans for Nestlé, including some or all of Third Point’s proposals, as seen in recent announcements. Third Point’s move might be seen as hostile to Nestlé, but it could well be a great ally and accelerator for Mark Schneider in his strategic plan.”
Some analysts do not believe that Nestlé will spin-off the L’Oréal stake right now.
“For the time being, Nestlé needs L’Oréal,” reasoned Pierre Tegner, a food, home and personal care analyst at Natixis, referring to the fact that L’Oréal generates 10 percent of Nestlé’s net profits. “To sell would be dilutive.”
There are various possibilities concerning how Nestlé might sell the L’Oréal share if it were to happen. That could be to L’Oréal, to another stakeholder or through an operation whereby the shares could be given to Nestlé shareholders after which L’Oréal would be free to buy them back.
One complication stemming from L’Oréal buying Nestlé’s stake, highlighted by an analyst, is that it could mechanically cause the holding of the Bettencourt Meyers family — the beauty company’s largest individual shareholder with 33.05 percent of the company — to rise above the 33.33 percent threshold that under French law would oblige the Bettencourt Meyers to purchase all of L’Oréal, unless the family were given a difficult-to-obtain special status by the French regulator.
“L’Oréal has always expressed interest to buy back more [of the stake] if and when Nestlé is willing,” said Eva Quiroga, an analyst at Deutsche Bank, who added: “L’Oréal can buy back 10 percent every 18 months. If Nestlé were to sell to L’Oréal it would therefore be a multiyear process.”
Quiroga believes L’Oréal would probably sell its 9.15 percent stake in Sanofi to pay for part of the buyback. “A share buyback would meaningfully enhance L’Oréal’s earnings, hence the positive share reaction today,” she continued.
There has been longstanding speculation over what Nestlé might do with its significant stake in L’Oréal. The company already, three years ago, pared down its holding in the firm.
In February 2014, Nestlé announced it would reduce its stake in L’Oréal to 23.3 percent — valued currently at more than 25 billion euros — from 29.4 percent. At the time, Nestlé chairman Peter Brabeck-Letmathe said the company’s share in L’Oréal was a financial involvement “but also strategic with long-term interest.”
He said the change in the holding no way represented the first step of a disengagement from L’Oréal, “not at all.” The executive emphasized Nestlé’s commitment and support for L’Oréal, and the company’s relationship with the Bettencourt Meyers family.
In July 2014, L’Oréal completed the acquisition of 48.5 million of its own shares from Nestlé and the disposal of its 50 percent ownership in Galderma to the Swiss multinational. L’Oréal’s shares it had acquired were then immediately canceled.
The complex transaction reduced Nestlé’s stake in L’Oréal to 23.29 percent of its share capital from 29.4 percent, and increased the stake held by the Bettencourt Meyers family to 33.31 percent from 30.6 percent.
Nestlé paid for Galderma for an enterprise value of 3.1 billion euros via 21.1 million L’Oréal shares. For the remaining 27.3 million shares, L’Oréal paid 3.4 billion euros. Meanwhile, Nestlé’s number of representatives on L’Oréal’s board was reduced to two from three after the resignation of Paul Bulcke, Nestlé’s then ceo.
“The 2014 transaction serves as some precedent for [L’Oréal] immediately retiring shares and we see the potential for [a] similar scenario to occur with the remainder of the Nestlé stake,” wrote Jonathan Feeney, an analyst at Consumer Edge Research, in a note.
Nestlé is the second major consumer goods giant that has come under attack since the start of 2017. In February, Kraft Heinz Co. made, and then withdrew, a $143 billion bid to acquire Unilever, as reported.
Loeb has in the past been a vocal activist investor in companies such as Dow Chemical Co., Sony Corp. and Seven & I Holdings Co., in the U.S. and Asia.