Nestle plans $20.8 bn share buyback over 3 years amid Third Point pressure

Buyback creates shareholder value, would adjust as necessary to reflect any potential big acquisitons

ZURICH (Reuters) - Nestle announced plans to buy back as much as 20 billion Swiss francs ($20.79 billion) worth of shares over three years, days after U.S. 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 $3.5 billion stake in the company on Sunday when it started pushing for Nestle to more aggressively boost performance and buy back shares.

Nestle said its announcement on Tuesday was the result of a review of its priorities that began in early 2017. It did not mention Third Point in its statement.

Third Point declined comment on Nestle's announcement.

Nestle said its buyback program would start on July 4, and would be adjusted as necessary to reflect any potential big acquisitions.

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

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

 

HOPES OF CHANGE

Nestle shares had jumped 4 percent on Monday, adding some $10 billion in market value before falling 1.6 percent on Tuesday, on hopes the push would speed up changes under Nestle's new chief executive, Mark Schneider.

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

"Nestle's recent announcement that it would explore strategic options for its U.S. confectionery business is consistent with this overall approach," the company said.

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

Loeb, who has taken on giants such as Yahoo and Sony, has argued that even though Nestle has exposure to promising categories such as coffee and pet food, its shares have underperformed rivals in recent years as it has "remained stuck in its old ways".

 

IMPROVEMENT AVENUES

"It is rare to find a business of Nestle's quality with so many avenues for improvement," Loeb said in the letter to the fund's investors.

Nestle should set a target for margin growth to improve productivity, double its leverage to fund share buybacks, shed non-core assets and sell the 23 percent stake it owns in French cosmetics group L'Oreal, he said.

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.

CEO Schneider, who had already met Loeb, seemed to hint at that last week when he told a conference in Berlin: "Size alone does not protect you from the winds of change."

Coupled with a shock $143 billion takeover bid from Kraft Heinz for Unilever in February, it shows the impatience of some investors about how rapidly multinationals are adapting to slower demand.

Nestle, and rivals such as Unilever and Danone are struggling to grow as emerging markets slow, consumer habits change and people flock to smaller, independent brands they see as healthier or more authentic.

($1 = 0.9618 Swiss francs)

 

(Reporting by John Miller and Silke Koltrowitz in Zurich and Michael Flaherty in New York, editing by Michael Shields)