Shares in Switzerland's Nestlé jumped on Monday after US activist investor Daniel Loeb called on the world’s largest food group to boost profits and sell its stake in French cosmetics company L'Oreal.
Third Point, Loeb's hedge fund, has backed up its demands on Nestlé by taking a $3.5bn position, buying about 40 million shares which represent 1.3% of the company.
In a letter to its investors on Sunday, Third Point said it had begun "productive conversations" with Nestlé management.
Calls for performance improvements
The letter claimed: "It is rare to find a business of Nestlé’s quality with so many avenues for improvement."
Nestlé's chief executive Mark Schneider acknowledged investors' appetite for an "improved combination of growth rates and margins" after taking over at the helm of the company in January.
But this has not satisfied Third Point. It's letter continued that Schneider would need to "articulate a decisive and bold action plan that addresses the staid culture and tendency towards incrementalism that has typified the company's prior leadership and resulted in its long-term underperformance".
Shares in Nestlé have risen more than 20% in the last six months and some investors now feel the stock is fully valued. In 2016 annual sales growth fell to its slowest pace in more than 10 years.
Analysts at Berenberg, which downgraded its rating on Nestlé to hold from buy, said in note to investors earlier this month that they were looking to Schneider to "shed light on initiatives" at the company's capital markets day in September.
L’Oreal stake sale
Third Point's proposals include a formal profit margin target between 18-20%, the sale of its 23% stake in L'Oreal and non-core portfolio assets, and increasing debt to fund share buybacks.
"The L’Oreal stake could be divested via an exchange offer for Nestlé shares that would accelerate efforts to optimise its capital return policies, immediately enhance the company’s return on equity, and meaningfully increase its share value in the long run," the Third Point letter continued.
Nestlé announced earlier in June that it was withdrawing from the US confectionary business. Such a move would likely involve the sale of brands that include Butterfinger and Baby Ruth.
Activists target consumer brands
Loeb's interest in Nestlé continues a growing trend for activist investors targeting consumer brands companies.
In February, Trian Fund Management – the investment vehicle of Nelson Peltz – revealed a position in US household products group Procter & Gamble that is now worth $3.3bn.
Two years ago Bill Ackman's Pershing Square Capital Management built a $5.6bn stake in Mondelez International, maker of Orios, and helped foster cost cutting plans.
On Monday, shares in Nestlé were up 4.8% at SFr86.