Hot Scoop! Ben & Jerry's Needs to Watch Out

(Bloomberg Opinion) -- Nestle SA Chief Executive Officer Mark Schneider just proved his ability to be both strategic and creative as he methodically shapes the Swiss food giant, scooping and scraping up where he can.

The company, which spans water, pet food and coffee, on Wednesday agreed to sell its U.S. ice cream business for $4 billion to Froneri, the joint venture it created three years ago with private equity group PAI Partners. The price equates to 2.2 times Nestle’s U.S. ice cream sales in 2018, similar to the multiple European rival Unilever NV achieved when it sold its spreads business to KKR & Co. almost exactly two years ago. That looks reasonable for Nestle’s unit, which includes the Haagen-Dazs brand in the U.S.

With the sale, Schneider, a German-American educated at Harvard Business School, is very close to his target of changing up 10% of Nestle’s portfolio, helping to keep activist investor Dan Loeb happy. An outright sale would have been cleaner. But given that Froneri already holds Nestle’s European ice-cream assets, it was probably the easiest option.

Nestle and PAI will each inject some funds into the joint venture to facilitate the deal. Even so Nestle should still receive between $3 billion and $4 billion in cash from the proceeds.

Hot Scoop! Ben & Jerry's Needs to Watch Out

Most importantly, there is scope for a fuller exit in time. PAI could acquire Nestle’s stake in the joint venture, or, more likely, the two could pursue an initial share sale for Froneri. Increasing sales growth, elevating profitability by developing Haagen-Dazs and cutting costs could potentially generate further value for Nestle in a few years’ time.

That Nestle has been able to find a creative way to offload ice cream is encouraging. Schneider had already tackled many of the obvious disposal candidates within the group, including the U.S. confectionery and skincare divisions.

Stay tuned for more. He may be equally imaginative with other parts of the group, such as its joint ventures in cereals with General Mills Inc., the U.S. maker of Cheerios, and in chilled dairy with Lactalis International, the French milk and cheese company.

For example, Nestle has a few more ice cream divisions in Canada, Latin America and Asia that could be folded into Froneri in due course. But it’s likely Nestle didn’t want to rush it to avoid a bout of indigestion. There are other disposal candidates elsewhere in the group. It is already selling its Herta cooked meats business, while Bloomberg News has reported that it’s weighing the $1 billion sale of two Chinese brands.

At least some parts of  the U.S. frozen-food division, such as pizzas, could be put on the block, although Nestle has so far stressed its commitment to staying in the business of frozen food. It doesn’t want to miss out on the latest trends with people cooking less and cutting down on meat, which has created a boom in vegetarian and vegan dishes. And although Nestle has restructured its waters business, indicating it wants to keep this division rather than offload it, it could always decide to carve out for sale the part that delivers bottles and dispensers directly to homes and offices.

Hot Scoop! Ben & Jerry's Needs to Watch Out

And of course there is Nestle’s stake in L’Oreal SA, although so far the group has remained committed to this. Nestle doesn’t need the money. Even with returning $20 billion to shareholders, year-end net debt is estimated just 1.4 times Ebitda. Deleveraging isn’t part of the strategy, indicating further capital returns. A wild card would be a big deal, for example in medical nutrition.

In the meantime, it’s a question of delivering on Schneider’s strategy of steering a steady course between revenue-driven start-ups that make little profit and companies that prioritize margin expansion at the expense of investing in growth. So far, this has paid off for Nestle shareholders, with the stock up 27% this year. But the turn of events may be slightly worrying for Magnum owner Unilever, which now faces a more muscular competitor in ice cream.

While Schneider has exhibited laser-like focus in M&A, Unilever’s relatively new CEO Alan Jope and incoming chairman, Nils Andersen, face the challenge of integrating the plethora of small acquisitions the Anglo-Dutch owner of Ben & Jerry’s has made over the past few years, all while trying to elevate sales growth.

That was already a tall order. Now they’ll need to add avoiding a malfunction in the frozen aisle to their to-do list.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Andrea Felsted is a Bloomberg Opinion columnist covering the consumer and retail industries. She previously worked at the Financial Times.

©2019 Bloomberg L.P.

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