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Nestlé Chief's Strategic Vision Overshadowed by Death at L'Oréal

Following the death of heiress Liliane Bettencourt, Nestlé management faces increased pressure to 'clarify its thinking on the company’s mid-term relationship with L'Oréal,' say analysts.
Nestlé corporate headquarter building in Vevey | Source: Shutterstock
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  • Bloomberg

VEVEY, Switzerland — As new Nestlé SA chief executive officer Mark Schneider prepares to lay out his strategic vision for the Swiss food giant, his plans will be overshadowed by a changing of the guard at another European consumer-goods giant — L'Oréal SA of France.

Nestlé owns 23 percent of the French cosmetics maker, and the death of heiress Liliane Bettencourt raises questions about the future of the investment. Hedge-fund chief Dan Loeb wants the Nespresso coffee owner to sell the stake, giving it the financial ammunition for a bigger transformation than anything analysts expect from Schneider’s first major presentation to investors.

Nestlé management faces increased pressure to “clarify its thinking on the company’s mid-term relationship with L'Oréal,” UBS analysts led by Pinar Ergun said in a note. While the base case for now is the status quo and a takeover bid is a possibility, a disposal is the most likely course in the mid to long term, she said, “given the diverging strategic paths of the two companies over the last decade.”

Schneider, who took over as chief executive in January, has already stolen some of his own thunder by announcing a share buyback worth as much as 20 billion Swiss francs ($21 billion) and acquiring coffee and fresh-food businesses, as well as moving to sell Nestlé’s US confectionery business. Nestlé is seeking growth in businesses such as coffee, water and pet food as it confronts a consumer backlash against sugary snacks that contributed to a June warning that sales growth this year will be the weakest in at least two decades.

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Loeb’s Third Point has called for more radical change after investing some $3.5 billion this year in the Swiss company, demanding a higher operating-margin target and a sale of its $28 billion L'Oréal stake.

Investor Day

Analysts said they expect Schneider won’t immediately budge on those issues when he takes the stage in the ballroom of London’s Corinthian Hotel on Tuesday before representatives of about 145 investors. He told Bloomberg Television in February, before Loeb disclosed his investment, that Nestlé’s stake in L'Oréal is “highly strategic” and there is no short-term urgency to alter the relationship.

Under an agreement with Bettencourt’s family, the biggest shareholder in the French company, neither side can increase its stake for six months after her death. Nestlé could sell its shares, but it has promised to act “in concert” with the family. Any change in shareholdings could also affect a third party — French pharmaceutical company Sanofi SA, in which L'Oréal holds 9 percent.

Instead of announcing transformational changes, Nestlé may simplify its matrix management structure in which product categories crisscross geographies, according to several analysts. One possibility would be to move the heads of three regional zones — Wan Ling Martello, Marco Settembri and Laurent Freixe — from the Vevey, Switzerland, headquarters overlooking Lake Geneva to be closer to their markets in Asia, Europe and the Americas, according to Sanford C. Bernstein’s Andrew Wood.

“It’s devilishly hard to drive change and leverage scale in a landscape complicated by multiple local fiefdoms and baronies,” wrote Martin Deboo, an analyst at Jefferies. “Try watching ‘Game of Thrones’ for a primer.”

While Loeb has said he wants constructive dialogue as a long-term shareholder, Nestlé’s baby steps raise the risk of an eventual showdown. The hedge-fund chief has never been one to shy away from a fight, and this is the largest investment he has made in a company since he founded Third Point in 1995.

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Loeb has urged Nestlé to increase leverage to at least 2 times earnings before interest, taxes, depreciation and amortisation, yet Schneider undershot that, raising his target to 1.5 times. The chief executive has warned that excessive cost-cutting isn’t a sustainable strategy because it won’t produce growth in new businesses.

Representatives for Nestlé and Loeb’s Third Point declined to comment on the investor day. A Nestlé spokeswoman also declined to comment on Bettencourt’s death, beyond expressing the company’s condolences.

Even if Loeb doesn’t immediately get his way, Bettencourt’s death removes a potential hurdle to bigger changes down the road — including the possible sale of a L'Oréal stake it has held for more than four decades. The Swiss giant could use the proceeds from a sale of the investment in the cosmetics company to fund a major acquisition such as the medical nutrition unit of Abbott Laboratories, said Alain Oberhuber, an analyst at MainFirst Bank AG.

“Midterm I believe that Nestlé will sell its 23 percent stake, but only if Nestlé can invest this proceeds into an interesting company,” Oberhuber said.

By Scott Deveau and Corinne Gretler; editors: Elizabeth Fournier, Thomas Mulier and Eric Pfanner.
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