Consumer goods make appetising target for US activists

Nelson Peltz has always had a healthy appetite for food. Heinz, Cadbury, Mondelez, PepsiCo and Danone — the veteran US activist investor has agitated for change in them all.

Mr Peltz’s taste have broadened with his ambitions. This week, the 75-year old launched a proxy battle to get a seat on the board of Procter & Gamble, the US’s biggest household products company with a $226bn market value, in which Mr Peltz’s Trian investment group invested $3.3bn this year.

And Mr Peltz is not alone at the table. Nestlé, the world’s largest consumer goods group, discovered last month that its SFr259bn market value was no longer a defence against activist incursion. Dan Loeb, founder and chief executive of Third Point, took a $3.5bn stake in the producer of KitKat chocolate and Nespresso coffee.

Mr Loeb called for a “greater sense of urgency” in boosting performance at the Swiss company, which he described as “staid” and “stuck in its old ways”. Mr Peltz used similar language about P&G — pointing to “excessive cost and bureaucracy” and “a slow moving and insular culture”.

Francois-Xavier de Mallmann, chairman of investment banking at Goldman Sachs, says that activists are stepping up their activity in the consumer goods sector.

“Activists have been investing in the consumer sector for several years but there has been a sizeable increase in both the number and size of the companies they have targeted over recent months.”

Consumer goods companies can make appetising targets. Companies such as P&G and Nestlé — alongside peers that have come into the sights of activists, such as Unilever and Mondelez — are easily criticised for their sprawling empires, weighed down by excessive costs and inefficient staff protected by the size of the business and ingrained management approaches.

But analysts say that the bulk of these companies is almost the point — within their hundreds of thousands of staff, shelves of products and rosters of marketers lies the fat that can be trimmed.

Activists see the potential to boost profits by cutting costs and use their large, cash-dispensing balance sheets that have relatively little leverage to boost shareholder returns.

“Sales growth in consumer industries has slowed and because of this you are seeing the rise of activist investors, looking to cut costs to boost profitability,” said David Dudding, European equities fund manager at Columbia Threadneedle Investment.

Analysts say that the strongest impetus for activists is the potential to drive up profits, as demonstrated repeatedly by 3G Capital, the Brazilian-led private equity group. It has for decades been acquiring consumer companies, cutting costs and boosting profits to levels described by Peter Brabeck-Letmathe, chairman emeritus of Nestlé, as “revolutionary”.

After 3G bought Heinz in 2013 with Warren Buffett, the ketchup maker’s profit margins soared 58 per cent within two years to 28 per cent — almost twice Nestle’s 15 per cent operating profit margin. 3G and Mr Buffett’s Berkshire Hathaway group went on to merge Heinz with Kraft in 2015. 

This year, they stunned the consumer goods world with the $143bn takeover bid from Kraft Heinz for Unilever, which is twice the size of Kraft Heinz in revenues. The bid was quickly dropped after stiff opposition from Unilever but the bold approach has left even the biggest consumer goods companies looking vulnerable.

“The catalyst for the focus on consumer groups from activists is the increasing polarisation in the sector between those companies that have been through a 3G-style cost-cutting process and those that haven’t,” said Raphaël Pitoun, chief investment officer at Seilern Investment Management.

“Companies such as Nestlé, Colgate, P&G and others haven’t been through that process so activists see an opportunity to drive earnings per share growth through cost-cutting.”

Mr Peltz has highlighted P&G’s weak organic growth and said its cost-cutting plans have not translated into higher operating profits and shareholder value creation. Mr Loeb’s criticisms of Nestlé are similar. He has called for the company to adopt a formal margin target, something that Mark Schneider, Nestle’s new chief executive, was already considering.

Another attraction is the low levels of debt at many large consumer companies, including Nestlé, Unilever and L’Oréal al, compared to other industries.

Mr Loeb has described Nestle’s net debt of 1 times earnings before interest, tax, depreciation and amortisation as “remarkably low”. He has urged the group to double its borrowings, “monetise” its 23 per cent stake in L’Oréal, which is valued at about $25bn, and return capital to shareholders.

Mr Schneider announced a buyback programme of up to SFr20bn a few days after Mr Loeb burst on the scene, although Nestlé said this had been planned for months.

Unilever too has been jolted into action after the failed Kraft Heinz bid. The company behind Dove soap and Ben & Jerry’s ice cream has sharpened its focus on profitability, setting a target of 20 per cent operating margin by 2020, from 16 per cent last year.

Graeme Pitkethly, Unilever finance director, said on Thursday that it had made €1bn in savings in the first six months of the year out of a three-year €6bn savings programme.

The cost-cutting included reducing advertising agency fees by 17 per cent and lowering the average cost of making an ad by 14 per cent. Staff had taken 30 per cent fewer flights, and each seat cost a quarter less.

But activist investors are also flush with cash and on the hunt for returns outside the US. For investors such as Mr Loeb, Europe was once seen as an uncertain place to attempt to mount a campaign given varying laws and shareholder rights.

All that has changed given the perception of better value in many industries than in the US. David Neuhauser, founder of the small Chicago-based activist investor Livermore Partners, says his fund is increasingly looking to Europe.

“I see a lot more things to do in Europe than in the US, and a lot of that is due to valuation and opportunity and growth prospects,” said Mr Neuhauser. “Some of the things in the US, the valuations are high and they do seem to have their defences up quicker.”

Moody’s, the rating agency, said that despite experiencing outflows last year “activists still have plenty of spending power to take on even the largest companies”, although it added that they usually target smaller groups.

Chris Plath, a Moody’s vice-president, expects more activist campaigns this year. “International activism continues to gain steam. This increase reflects the relative lack of low-hanging fruit among US large-caps.”

The big question being asked by executives in the sector is whether the increased activist appetite will be healthy for the industry — stimulating faster change as it grapples with low growth and a shift in the way people buy food and household goods.

Or whether activists end up benefiting their funds more than the longer-term growth potential of the companies.

Mr Dudding said: “We tend to be agnostic about activists’ presence on shareholder registers. In the long run, consumer staples stocks do better when they reinvest cost savings in driving top line growth and shouldn’t be bullied into prioritising short-term profitability over long-term brand equity.”

The ideal is when both sides win. Mr Peltz in 2013 argued that PepsiCo was plagued by a “culture of sycophants”, pushing the company to split its drinks business from its faster-growing snacks unit. Indra Nooyi, chief executive, resisted but eventually agreed to add a Trian representative to the board.

PepsiCo shares gained 50 per cent over the course of the campaign, as the company aggressively cut costs and improved margins to take the edge off Trian’s pressure. 

“In a slow-moving industry like consumer packaged goods, you have a good safety net so companies don’t blow up. So a lot of them have been complacent,” said Ali Dibadj, analyst at Bernstein. “It’s perfect for activism because they have the room to cut massive amounts of costs.”


Leave a Reply

Your email address will not be published.

18 − 1 =