A Wall Street legend is taking on the $265 billion giant behind Kit Kat, Butterfinger and Nescafé

Third Point, a $US15 billion activist hedge fund founded by billionaire Dan Loeb, just took a massive stake in Nestlé.

While Third Point owns only about 1.4% of the Swiss company — Third Point’s 40 million shares are worth more than $US3.5 billion — it’s one of the biggest activist plays ever.

It’s the biggest position Loeb has ever taken and the biggest company his fund has ever gone after, per Bloomberg. Nestlé has a market cap of about $US265 billion.

The company is behind a slew of familiar candies, such as Butterfinger, Raisinets, Baby Ruth and KitKat, as well as Gerber baby food and Nescafé.

As of March, Third Point was raising fresh money from investors, an infrequent move for the fund, Business Insider reported. It’s not clear if that capital raising is still happening or if it was directly linked to building the huge Nestlé stake. A spokesperson for Third Point couldn’t immediately be reached.

Here’s a roundup of Third Point’s thesis, according to a letter that the fund sent to investors on Sunday, June 25. Emphasis added:

  • Nestlé works within a number of “advantaged categories including, coffee, infant formula, pet food and bottled water. Nestlé also has a strong footprint in emerging markets. The category and geographic mix of the portfolio is excellent and offers the company a long runway for growth as emerging market customers increase consumption and developed market consumers trade up.”
  • Nestlé has been underperforming its competitors, however. Here’s Nestlé’s performance, on a total shareholder return basis, per Third Point.

  • “Nestlé has fallen behind over the past decade in an environment where growth has slowed due to changes in consumer tastes and shopping habits, as well as an influx of new competition from smaller, local brands.”
  • “Third Point invested in Nestlé because we recognised a familiar set of conditions that make it ripe for improvement and change: a conglomerate with unrealized potential for margin improvement and innovation in its core businesses, an unoptimized balance sheet, a number of non-core assets, and a recent history of meaningful under-performance versus peers.”
  • Third Point is happy with Nestlé’s CEO, Ulf Mark Schneider, who the company hired last year. However, the hedge fund thinks that “in order to succeed, Dr. Schneider will 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.”
  • Third Point has hired Jan Bennink, an expert in the packaged goods space, to advise on the investment.

Here is what Nestlé has to do, per Third Point:

  • Adopt a formal margin target. Third Point thinks that Nestlé should be able to improve its margins by as much as 4% over the next several years.
  • Return capital in conjunction with a formal leverage target. “Nestlé should set a target of at least 2.0x, which would better optimise the company’s cost of capital. Getting to 2.0x and staying there would also produce enormous capacity for share buybacks over time.”
  • Re-shape its portfolio. Nestlé has more than 2,000 brands in food and beverage and health science. “Management must… strategically reduce exposure” to businesses that are not “key pillars of growth.”
  • Sell its stake in L’Oréal. “The company acquired 29% of L’Oréal, the global leader in beauty products, in 1974 and sold 6% in 2014. This has been a superb investment, and the remaining 23% stake is equivalent to more than $US25 billion, or roughly 10%, of Nestlé’s market capitalisation today. 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 … We also believe that the L’Oréal 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 as earnings improve over a reduced share count.”

Nestlé, in an emailed statement, 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.”

Third Point managed $US15 billion in hedge fund assets as of the start of the year, according to the Hedge Fund Intelligence Billion Dollar Club ranking.

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