Bottles of Nestle Vera water move on the production line at the Nestle SA bottling plant (Photographer: Alessia Pierdomenico/Bloomber)

Nestle Plans $21 Billion Buyback, Seeks Deals as Loeb Pushes

(Bloomberg) -- Nestle SA plans a 20 billion-franc ($21 billion) share buyback and said it’s on the hunt for acquisitions, just days after activist investor Dan Loeb disclosed a stake in a bid to shake up the world’s largest food company.

Nestle will funnel investment into coffee, pet care, baby food and bottled water and pursue opportunities in consumer health care as it starts its biggest buyback in a decade, the Vevey, Switzerland-based maker of Gerber baby food and DiGiorno pizza said in a statement Tuesday. 

The buyback was announced after Loeb’s hedge fund company Third Point urged the company to take such a step. The food maker completed its last repurchase in 2015, and new CEO Mark Schneider said in February in his first public appearance as chief that buying back stock is a lower priority than reinvesting in Nestle’s business and paying dividends. The company says it has bought back 47 billion francs worth of shares since 2005.

The Swiss company’s reaction echoes the strategic shift Unilever announced in April after Kraft Heinz Co.’s failed takeover bid. The Anglo-Dutch company said it would buy back 5 billion euros ($5.7 billion) of stock and divest its spreads business as the unsolicited $143 billion offer led Chief Executive Officer Paul Polman to pledge better shareholder returns. Both companies have been wrestling with slowing growth in their food businesses as consumers turn away from sugary snacks and processed fare.

Investor Engagement

Tom Russo, partner at Gardner Russo & Gardner, which has 10 percent of its $12 billion under management invested in Nestle, said the plan showed a new willingness to engage with investors under Schneider. Former chief Peter Brabeck-Letmathe once threatened to quit if shareholders didn’t approve plans to make him both CEO and chairman.

"It’s extraordinary," Russo said. "There’s a huge amount of concession to the proposals. Historically Nestle would have been considered really impregnable. The world no longer offers management the ability to say ’just go away.’"

In addition to recommending a buyback, Loeb urged Nestle to sell its 23 percent stake in cosmetics maker L’Oreal SA, eject underperforming brands and take on more debt. Schneider has already announced a review of Nestle’s U.S. confectionery business, including the Butterfinger and BabyRuth brands, that could result in a sale.

Third Point did not immediately respond to a request for comment.

Jean-Philippe Bertschy, an analyst at Bank Vontobel AG, said it was likely that Nestle had been working on the plan before Loeb disclosed his investment over the weekend.

“Nestle isn’t going to do quick reactions on shareholder demands," he said. "This move is an example of Mark Schneider having come in and carefully analyzing the company since the beginning of the year. It’s just the tip of the iceberg, we’re going to see much more."

Nestle said it will start repurchasing shares July 4 and the program will run through 2020. The company said the buyback will likely be backloaded in 2019 and 2020 to allow for acquisitions. The company said it expects a net debt to Ebitda ratio of about 1.5 in 2020.

Weakest Performer

Nestle was the weakest performer among six of Europe’s biggest consumer-goods stocks including Unilever and Anheuser-Busch InBev NV in the previous three years, Third Point said when announcing the purchase. The company’s 2016 sales growth fell to the slowest pace in at least a decade amid sluggish demand and Schneider abandoned Nestle’s long-standing revenue target two months after becoming CEO.

Nestle said that if it makes a "sizeable" acquisition, it may modify the buyback plan. The company bought Pfizer Inc.’s Wyeth baby nutrition unit for almost $12 billion in 2012, Gerber Baby Foods in 2007 for $5.5 billion and the remainder of its Galderma joint venture with L’Oreal SA for $4.3 billion in 2014.

Nestle’s plan builds on priorities Schneider outlined in February, when he said the company would build on its coffee, water and pet food businesses. Powdered and liquid beverages, including coffee, generated some 20 billion francs in revenue last year, about a quarter of total sales. Bottled water is the company’s lowest-margin unit but is growing rapidly, as is pet food.