Nestlé Plans Share Buyback After Pressure From Third Point -- 2nd Update

By Saabira Chaudhuri and Brian Blackstone Features Dow Jones Newswires

Nestlé on Tuesday announced plans to launch a $20.8 billion share buyback, focus its capital spending on categories like coffee and pet care, and look for consumer health care acquisitions, a move that comes after it found itself the target of activist investor Third Point LLC.

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Nestlé wasn't expected to deliver an update to investors until September but its plans were fast tracked after Third Point's founder Daniel Loeb on Sunday night published a letter making a number of recommendations for how Nestlé should change its business. These include a formal margin target, more share buybacks and a sale of Nestlé's stake in French cosmetics giant L'Oréal SA.

Mr. Loeb began amassing shares in Nestlé early this year, according to a person familiar with the matter, and now owns 1.25% of the company making him Nestlé's fourth-biggest shareholder. Shares jumped following Mr. Loeb's letter, which promised the company's growth and earnings would "dramatically improve" if the company followed his recommendations.

"All seems to have happened very quickly, but probably not a huge surprise given the strength of the balance sheet and pressure from Third Point and others," said Jon Cox, head of Swiss equities at Kepler Cheuvreux.

Nestlé applied for Swiss regulatory approval of its share buyback last week, and received the OK earlier Tuesday.

Under new Chief Executive Mark Schneider, Nestlé has already dropped a long-running sales-growth target investors had labeled as outdated after the company missed that goal for the fourth straight year. Mr. Schneider also recently said Nestlé would look to sell its U.S. confectionery business, which lags behind rivals Hershey Co., Mars Inc. and Chocoladefabriken Lindt & Spruengli AG.

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Tuesday, Nestlé indicated it could make more divestitures, saying it "will continue to adjust its portfolio in line with its strategy and growth objectives." Nestlé has faced calls to consider selling its frozen-food arm, which includes brands like Lean Cuisine and Stouffer's, another business that has struggled as consumers increasingly look to fresh options. Mr. Loeb suggested that Nestlé sell its 23% stake in L'Oréal.

Nestlé will kick off a share buyback of up to 20 billion Swiss francs next week that will run through June 2020. In addition to investing in beverages, infant nutrition and other high-growth categories, the company said it would also look to make acquisitions in consumer health care that help the faster-growing parts of its core food and drinks business. It didn't specifically refer to its frozen and prepared foods business, although Nestlé is the world's largest packaged-food company.

"The company is likely to exit more commoditized packaged food in favor of nutrition," said Mr. Cox.

The Vevey, Switzerland-based company said it would examine ways to boost margins through cost cuts but cautioned that it would only do so if these don't undermine its performance in growth categories. Mr. Schneider has been a vocal critic of the aggressive cost-cutting pioneered by Brazilian firm 3G that has been used by companies it owns like Kraft Heinz Co. and Anheuser-Busch InBev NV, saying this hasn't been proved to be sustainable.

Tuesday's announcement echoes that of rival Unilever PLC, which in April announced a EUR5 billion ($5.7 billion) share buyback and said it would sell its spreads division after fending off a takeover approach by Kraft.

Nestlé, Unilever and other consumer goods stalwarts have struggled to turn in the consistent growth rates investors had come to expect as they deal with a raft of headwinds including weaker global growth, volatile currencies and interest rates, higher commodity costs, rapidly changing consumer tastes and a difficulty raising prices in an environment of low inflation.

Nestlé on Tuesday said the buyback could be curtailed should a big acquisition take place before 2020 and that most of the monthly share repurchases will be made in 2019 and 2020 to allow it to pursue deals that make sense. The buyback is Nestlé's biggest since 2007. It has bought back 47 billion francs in shares since 2005.

The company said it had been examining its capital structure and ways to deliver higher shareholder returns since the start of the year, when Mr. Schneider became CEO. Mr. Loeb has had several conversations with Nestlé's investor relations team, and more recently met with Mr. Schneider to convey his recommendations, according a person familiar with those talks.

Write to Saabira Chaudhuri at saabira.chaudhuri@wsj.com and Brian Blackstone at brian.blackstone@wsj.com

(END) Dow Jones Newswires

June 27, 2017 14:55 ET (18:55 GMT)