Nestle CEO Schneider Seeks Deals as Sales Growth Stutters

(Bloomberg) -- Nestle SA Chief Executive Officer Mark Schneider needs to keep filling his shopping cart.

The Swiss owner of Nespresso coffee and Perrier water said it plans “active portfolio management” after its weakest sales growth in more than 20 years. Schneider said he sees the most potential in small and medium-sized deals, even as the company opened the door to a bigger one -- a possible sale of its 23 percent stake in L’Oreal SA.

Since taking over about a year ago, the new CEO has fired up Nestle’s mergers-and-acquisitions machine, snapping up Canadian dietary supplements maker Atrium Innovations for $2.3 billion and Blue Bottle Coffee while jettisoning the company’s ailing U.S. confectionery business. Turnaround efforts haven’t been enough to offset erosion of mass-market food brands, as Nestle’s 2017 sales growth fell short of analyst expectations.

Nestle dropped as much as 2.8 percent in Zurich.

“Some of these things have a time lag to kick in,” Schneider said at a press conference. The Blue Bottle coffee purchase won’t boost organic growth until the year-end, while the effects of the Atrium deal won’t be felt until mid-2019.

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Schneider is under pressure to boost returns after activist investor Dan Loeb took a $3.5 billion position in the company. The hedge-fund manager wants Nestle to sell its stake in L’Oreal, an investment that dates back to 1974. Such a move could prompt a broader realignment of shareholdings in some of Europe’s biggest companies, including French drugmaker Sanofi, in which L’Oreal holds a stake.

A sale would deprive Nestle of the French cosmetics company’s faster growth while giving it more ammunition for bigger acquisitions. Nestle said it won’t increase its stake in L’Oreal and won’t renew a shareholder pact with the Bettencourts, the family of the company’s founder. Schneider said those are the only decisions the Swiss company has made so far regarding the holding, as Nestle wants to keep its options open.

“We remain committed to the company that has given us very good returns over the years,” Nestle said, adding it wants to maintain constructive relations with the Bettencourts.

L’Oreal Agreement

L’Oreal said last week that it’s ready to buy out Nestle’s holding. Under the shareholder agreement, neither the Swiss company nor the Bettencourt family can increase their stakes in the cosmetics maker until March 21 -- six months after the death of L’Oreal matriarch Liliane Bettencourt.

A sale of the stake is not imminent, according to Robert Waldschmidt, an analyst at Liberum. “A spinoff of the stake to shareholders is as likely as an outright sale” if Nestle doesn’t need the cash for a big acquisition, he wrote.

In a possible smaller-scale deal, Nestle said it may sell a life-insurance business that it acquired with the Gerber baby food brand in 2007. The unit has annual revenue of 840 million francs ($906 million). Such a sale would put Nestle about one-third of the way toward a target of transforming 10 percent of its portfolio through acquisitions and divestments. Schneider also said he doesn’t want to create a public list of other assets to sell because that would destabilize management.

“It’s a seller’s market,” Chief Financial Officer Francois-Xavier Roger said in an interview. “So shall we take the opportunity to sell more assets? When we’re buying, we need to be careful. Some asset prices are quite terrible, they’re extremely high.”

Nestle was among companies considering bids for the consumer over-the-counter businesses of pharmaceutical companies Pfizer Inc. and Merck KGaA but has bowed out of the Pfizer sales process, according to people familiar with the matter. Schneider, who gained a reputation for dealmaking at German medical-device maker Fresenius before joining Nestle, said he wants to keep expanding the Swiss company’s health unit.

“With Atrium, now we have under contract the first meaningful step here to expand significantly the footprint of Nestle Health Sciences,” he said. “We have an interest in expanding in consumer OTC health care.”

CFO Roger said Nestle is focusing on closing and integrating the Atrium transaction.

“Showing interest for a certain category doesn’t mean we have to buy everything that’s flying around,” Roger said. “Looking is one thing, signing is another.”

Sales Growth

Schneider is aiming to lift Nestle’s sales growth -- a mere 2.4 percent on an organic basis in 2017 -- to as much as 4 percent this year. Speaking on Bloomberg TV, he said he’s “somewhat” optimistic for pricing and volume growth for 2018 and beyond.

Schneider, the first outsider to run Nestle in almost a century, beat his goal of improving the underlying trading operating margin by at least 0.2 percentage points, excluding currency shifts. The margin rose 0.5 percentage points.

While vowing a disciplined approach to dealmaking, Schneider signaled that he’s on the lookout for opportunities -- even if that means aiming higher.

“The sweet spot is in small to mid-sized deals, but we don’t want to rule out anything,” Schneider told reporters in Vevey, Switzerland.

To contact the reporter on this story: Corinne Gretler in Zurich at cgretler1@bloomberg.net.

To contact the editors responsible for this story: Eric Pfanner at epfanner1@bloomberg.net, Thomas Mulier

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