Nestle plans 20.8b Swiss francs share buyback

[ZURICH] Nestle plans to buy back as much as 20 billion Swiss francs (S$28.8 billion) worth of shares over three years, it said on Tuesday, days after US activist shareholder Third Point LLC began a campaign to boost performance at the company.

The New York-based hedge fund, controlled by billionaire investor Daniel Loeb, disclosed a US$3.5 billion stake in the company late on Sunday when it started pushing for Nestle to more aggressively boost performance and buy back shares.

Nestle, maker of Gerber baby food and Perrier water, said its announcement was the result of a review of its priorities that had begun in early 2017. It did not mention Third Point in its statement, and Third Point declined to comment on the announcement.

Such buyback plans take time to get approved, making it clear that Nestle had finalized the plan before Third Point made its position public.

It could not be known, however, whether feedback that Mr Loeb might have given Nestle in a meeting earlier this month was taken into consideration when crafting the final buyback plan, which will start on July 4.

Still, the timing of the announcement suggests that pressure brought to bear by the activist investor, who has taken on giants including Yahoo and Sony Corp, may have played a role.

"The timing of Nestle's announcement gives the impression that management has been cowed or bullied by an activist investor owning 1.3 per cent of the company," said Bernstein analysts, in a reference to Loeb.

Nestle said that share buybacks offer a "viable option to create shareholder value" in the context of low interest rates and strong cash flow generation.

The volume of monthly share buybacks will depend on market conditions but will probably occur mostly in 2019 and 2020, so Nestle can consider acquisitions before then, it said.

The company now expects to increase its level of debt to about 1.5 times earnings before interest, taxes, depreciation and amortization (EBITDA) by 2020. That would be up from about 0.8 times last year.

Vontobel analyst Jean-Philippe Bertschy did not see the announcement as a direct result of Third Point.

"We rather see today's announcement as a thorough strategic review triggered by CEO Mark Schneider, approved by the board," he said, noting that this was Nestle's second-biggest buyback following 25 billion Swiss francs in 2007. The company has bought back 47 billion francs worth of shares since 2005.

Nestle shares had jumped 4 per cent on Monday, adding some US$10 billion in market value before falling 1.6 per cent on Tuesday, on hopes the push by Third Point would speed up changes under Mr Schneider, who took over as CEO in January.

On Tuesday, Nestle said it will focus any capital spending on high-growth food and beverage categories including coffee, pet care, infant nutrition and bottled water, as well as growth opportunities in consumer healthcare.

The company has already made a series of investments in health-related businesses, and its appointment of Mr Schneider, a healthcare industry veteran, suggests it will push further on the boundaries between nutrition and health.

Nestle said this month's announcement that it may sell its US confectionery business was consistent with that approach.

"The company will continue to adjust its portfolio in line with its strategy and growth objectives," Nestle said.

Billions of dollars worth of assets are up for grabs as the global packaged food industry adapts to slowing growth. For example, Unilever is selling its margarine and spreads business and Reckitt Benckiser is selling its mustard business.

The pressure placed on the world's largest food group, Europe's most valuable company, shatters perceptions that the Swiss giant with over 2,000 brands is too big to shake up.

REUTERS