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Activist hedge fund Third Point demands major change at Nestle

Swiss food and drink giant Nestle has become the latest target for activist US hedge fund Third Point, which has taken a one percent stake in the company and demanded major changes, including offloading its large holding in L'Oreal.

Activist hedge fund Third Point demands major change at Nestle
Nestle Chief Executive Officer Mark Schneider. Photo: Richard Juilliart / AFP

Third Point has a reputation for aggressively pushing for change at target firms, including Sony and Yahoo!, and gave a stinging assessment of Nestle's performance in recent years as it announced its acquisition on Sunday.

Third Point said it had acquired one percent in Nestle, worth $3.5 billion (3.1 billion euros), in a letter to investors on Sunday that lamented the Swiss conglomerate's company's recent underperformance in comparison with its rivals.

The letter said that despite having “arguably the best positioned portfolio in the consumer packaged goods industry”, shares in Nestle – whose brands include Nescafe coffee and Perrier water – had significantly lagged most of their US and European competitors.

READ ALSO: Nestle creates low-sugar chocolate that still tastes as sweet

“It is rare to find a business of Nestle's quality with so many avenues for improvement,” Third Point said.

The conglomerate's longstanding target of growing sales by five to six percent a year, the so-called “Nestle model”, has struggled over the last four years in the face of a slowdown in emerging markets and weak consumption in Europe.

“While its peers have adapted to this lower growth world, Nestle has remained stuck in its old ways,” Third Point said.

News of Third Point's intervention brought a boost for Nestle shares, which were up up 4.32 percent at 1232 GMT.

Sell, because it's worth it

Third Point hailed the appointment of Ulf Mark Schneider at the head of Nestle in January and urged him to take bold steps to tackle the “staid culture and tendency towards incrementalism that has typified the company's prior leadership”.

One of four main demands from the hedge fund was for Nestle to sell its 23 percent stake in L'Oreal, valued at more than $25 billion – around ten percent of Nestle's market capitalisation.

“Having L'Oreal in the portfolio is not strategic and shareholders should be free to choose whether they want to invest in Nestle or some combination of Nestle and L'Oreal,” Third Point said.

Contacted by AFP, the French cosmetics company declined to comment on the matter.

Third Point also said Nestle should set a formal margin target of 18 to 20 percent by 2020, up from around 15 percent now and build up funds to buy back stock.

It also urged Nestle to rationalise its stable of brands – currently around 2,000 in food and beverage and health science – to focus on growth.

A Nestle spokesman told AFP that “as always, we are maintaining an open dialogue with all our shareholders”.

While Third Point's approach may appear hostile, the fund could prove to be a useful ally who could help Schneider implement his strategic plan, analyst Jean-Philippe Bertschy of Vontobel said.

Nestle has made a series of announcements recently, notably saying it planned to sell its US confectionery business – interpreted by investors as a sign that more changes could be afoot.

By Nathalie Olof-Ors

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ECONOMY

Geneva watch show opens in throes of Swiss banking turmoil

The Geneva watch fair opened this week buoyed by booming growth in the watchmaking industry, but insiders warily eyed the banking sector turmoil, evoking painful memories of the 2008 financial crisis.

Geneva watch show opens in throes of Swiss banking turmoil

Industry professionals were upbeat on the first day of the Watches and Wonders annual fair, where 48 prestigious brands including Rolex, Patek Philippe and Cartier were showing off their new creations.

The fair, which runs until Sunday with the weekend open to the public, kicked off after two years of record gains for Swiss watchmakers.

Exports soared by 31.2 percent in 2021, after a strong rebound in sales in the United States and the Middle East.

And the return of luxury tourism to Europe in 2022 after two years of Covid disruptions pushed exports up a further 11.4 percent to 24.8 billion Swiss francs ($27.1 billion).

The growth has also continued so far this year, with exports up by another 10.6 percent during the first two months of 2023, according to statistics from the Federation of the Swiss Watch Industry.

But optimism at the Geneva fair was somewhat dampened by the angst surrounding the turbulence currently lashing the banking sector.

Switzerland – whose vibrant banking scene is a key part of the country’s economy and culture – has been rocked to the core after the government strong-armed the nation’s biggest bank UBS into swallowing up its troubled competitor Credit Suisse, in a bid to ward off a larger global banking crisis.

READ ALSO: ‘A dark day’: How Switzerland reacted to shock UBS buyout of Credit Suisse

‘Global repercussions’

The upheaval has brought back difficult memories for Swiss watchmakers.

After the 2008 round of bank failures sparked a global financial crisis, Swiss watch exports plunged 22.3 percent in 2009 – more even than during Covid-dominated 2020.

“I am unable to say what the global repercussions will be,” Thierry Stern, the boss of Patek Philippe, told AFP.

“But I still think it should be easier than in 2008-2009.”

Participants are seen next to a giant watch by German manufacturer of luxury and prestige watches at the luxury watch fair in Geneva', on March 27, 2023 in Geneva.

Participants are seen next to a giant watch by German manufacturer of luxury and prestige watches at the luxury watch fair in Geneva’, on March 27, 2023 in Geneva. (Photo by Fabrice COFFRINI / AFP)

For the moment the difficulties remain “very localised” as Patek Philippe “sells all over the world”, said Stern, who is counting in particular on Asia to ensure growth in 2023.

Jerome Lambert, managing director of the luxury giant Richemont – owner of the Cartier, Piaget and IWC brands – acknowledged that the turnaround in
demand in 2009 had been “very rapid” and very “severe”.

“But it was a big lesson for us,” he said, explaining that the group had since taken distribution in hand.

Edouard Meylan, owner of the Hautlence brand, nevertheless believes that “lights are turning red”.

“If there is a financial crisis, it will have a very big impact on our sector,” he told AFP, especially since with supply difficulties some watchmakers have gone from “very large orders from their suppliers” and risk finding themselves with large stocks if the market turns.

Other analysts believe there is little reason to panic just yet.

“For now, I would expect the impact to be muted,” Jon Cox, an industry analyst with the Kepler Cheuvreux financial services company, told AFP, adding that he is still expecting to see growth this year of around 10 percent in exports.

READ ALSO: Swiss sweat over size of new superbank

Full steam ahead for China?

However, the Credit Suisse debacle, which threatens tens of thousands of jobs in the financial sector, could take its toll.

“The financial community is an important part of the buying public for the watch industry and there could be impact in local markets, such as Switzerland, on domestic business,” Cox warned, adding though that “this is likely to be offset by tourism”.

For now, Swiss watchmakers are looking to the Chinese market to pick up pace and ensure their 2023 export growth.

When demand was exploding in other markets as they rolled back pandemic protection measures, the watch market in China remained subdued as the country ploughed on with its zero-Covid rules, and then saw infection numbers explode when it abruptly ended that policy late last year.

But watchmakers and experts are expecting that to change with the reopening of the Chinese economy.

Jean-Philippe Bertschy, an analyst with Swiss investment managers Vontobel, warned however that “a return to normalcy” for Chinese watch sales – traditionally Swiss watchmakers’ largest market – will take time.

On the positive side, he told AFP he was confident, given “the level of savings the Chinese had set aside during the health restrictions”.

As for tourism, he cautioned that while Chinese travellers may quickly flock to Asian destinations, “it will take more time before they return to Europe,” due to the continued limited air transport capacity and visa backlogs.

By Nathalie OLOF-ORS

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