On July 26, 2018, Ulf Mark Schneider, was the chief executive officer (CEO) of the Switzerland-based Nestl S.A. (Nestl). For the first time in his 18-month tenure as the head of the global consumer-packaged goods company

, Nestl's results indicated the positive effects of the many strategic change

s he had spearheaded. Organic growth had shown a period-to-period increase of 2.6 per cent (versus 2.4 per cent for 2017) and operating margin had risen to 16.1 per cent (versus 15.9 per cent in 2017).2 The company was midway through its US$20 billion3 share buyback4and, in March 2018, had signed a $7 billion contract to sell Starbucks-branded coffee and tea in retail stores globally.5 Schneider had divested the company's US confectionary business and made several key acquisitions in its branded foods business.6 However, Nestl had not publicly responded to a hedge fund's insistence that the company sell its nearly $32 billion7 stake in the French cosmetics company, L'Oral S.A. (L'Oral).8

In a June 2017 communication, and later in a July 1, 2018, public letter to Nestl's shareholders, Third Point LLC (Third Point), a hedge fund based in New York City, made the L'Oral divestment a core piece of its rationale for strategic change at the company. Arguing that it was a passive investment that confused the identity of Nestl and affected its stock price

, Third Point indicated that the right strategic path for Nestl was to use the proceeds from divesting the L'Oral stake to buy back stock, make key acquisitions in its current food and nutrition businesses, and fund operational improvements

.9

Third Point's call on the L'Oral investment was only one of two related issues that Schneider and Nestl's board of directors faced. The other matter involved a six-month moratorium on any actions by Nestl regarding its stake in L'Oral, which had been enacted after the death of Lillian Bettencourt in September 2017. Before her death, Bettencourt had been one of the principal shareholders in L'Oral. However, the moratorium ended on March 21, 2018. Therefore, L'Oral had publicly requested clarity from Nestl on its intentions regarding the French cosmetic company.10 So, Schneider and his team needed to address Third Point's call and respond to L'Oral's request.

Il 26 luglio 2018, Ulf Mark Schneider,  stato amministratore delegato (CEO) della Nestl S.A. (Nestl), con sede in Svizzera. Per la prima volta nel suo mandato di 18 mesi come capo dell'azienda globale di beni di consumo confezionati, i risultati di Nestl hanno indicato gli effetti positivi dei numerosi cambiamenti strategici che aveva guidato. La crescita organica ha mostrato un aumento periodico del 2,6 per cento (rispetto al 2,4 per cento per il 2017) e il margine operativo  salito al 16,1 per cento (rispetto al 15,9 per cento nel 2017) .2 La societ era a met strada attraverso i suoi US $ 20 acquisto di azioni da miliardi34 e, a marzo 2018, aveva firmato un contratto da $ 7 miliardi per la vendita di caff e t a marchio Starbucks nei negozi al dettaglio in tutto il mondo.5 Schneider aveva ceduto l'attivit dolciaria negli Stati Uniti dell'azienda e fatto diverse acquisizioni chiave nella sua attivit alimentare a marchio.6 , Nestl non aveva risposto pubblicamente all'insistenza di un hedge fund secondo cui la societ vendeva la sua quota di quasi $ 32 miliardi7 nella societ francese di cosmetici, L'Oral SA (L'Oral) .8 

In una comunicazione del giugno 2017, e pi tardi in un 1 luglio 2018, una lettera pubblica agli azionisti di Nestl

, Third Point LLC (Third Point), un hedge fund con sede a New York City, ha reso il disinvestimento L'Oral un elemento fondamentale della sua logica per un cambiamento strategico in azienda. Sostenendo che si trattava di un investimento passivo che confondeva l'identit di Nestl e influiva sul suo prezzo delle azioni, Third Point indicava che il giusto percorso strategico per Nestl era utilizzare i proventi della cessione della partecipazione di L'Oral per riacquistare azioni, effettuare acquisizioni chiave in le sue attuali attivit alimentari e nutrizionali e finanziano miglioramenti operativi

L'appello di Third Point all'investimento di L'Oral era solo una delle due questioni correlate che Schneider e il consiglio di amministrazione di Nestl hanno dovuto affrontare. L'altra questione riguardava una moratoria di sei mesi su qualsiasi azione di Nestl relativa alla sua partecipazione in L'Oral, che era stata emanata dopo la morte di Lillian Bettencourt nel settembre 2017. Prima della sua morte, Bettencourt era stato uno dei principali azionisti di L 'Oral. Tuttavia, la moratoria si conclusa il 21 marzo 2018. Pertanto, L'Oral ha richiesto pubblicamente chiarezza a Nestl sulle sue intenzioni riguardo alla societ cosmetica francese.10 Quindi, Schneider e il suo team avevano bisogno di rispondere alla chiamata di Third Point e rispondere a L'Oral richiesta.

ABOUT NESTL

In 1867, Henri Nestl founded a company in Vevey, Switzerland, to develop and sell his infant formula. He ran it independently until merging it in 1905 with the Anglo-Swiss Condensed Milk Company to form the modern-day food and nutrition multinational. Over the years, Nestl grew both organically and via

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acquisitions. At the end of fiscal 2017, Nestl had $90.28 billion in revenues, sold its products in 189 countries, produced its goods in 413 factories that were located in 85 countries, employed 323,000 people, and owned over 2,000 brands. CEO Schneider reported to a board of directors that was led by chairman Paul Bulcke, who took office in fiscal 2018.11

In a presentation to investors, Schneider underscored Nestl's presence as a key global competitor in the nutrition, health, and wellness (NHW) market. In this market, Nestl's strengths included a strong portfolio with a presence in the market's growth segments, brands names that global consumers trusted, and a track record of successfully adapting to marketplace changes. Schneider indicated that food and beverage would be Nestl's core focus for the future, with a 27 per cent global market share in coffee, a 27 per cent global market share in infant nutrition, and a 10 per cent global market share in bottled water (Nestl Pure Life was the number one bottled-water brand worldwide). The consumer health-care segment was also Nestl's growth platform (see Exhibit 1).12

Given its broad portfolio of products, Nestl competed globally with a variety of major companies. The Hoover's Company Records market research service13 identified 43 Nestl competitors, ranging from Abbott Laboratories and Procter & Gamble Company in the health category to Danone S.A.; The Coca- Cola Company; Mondelz International, Inc.; General Mills, Inc.; and Kraft Heinz Company in the packaged foods market. Nestl encountered competition in multiple markets, from major multinationals competitors to local companies, in each product category where Nestl was active. Nestl's largest market was North and South America, accounting for over 30 per cent of 2017 revenues. Coffee accounted for CHF17 billion14 in 2017 revenues, with Nescaf and Nespresso as its two leading brands.15

In its financial statements, Nestl classified its stake in L'Oral as an investment in "Associates and Joint Ventures." Because of its 23.2 per cent stake, the L'Oral investment was accounted for using the equity method. With this method, Nestl initially recorded its investment at cost. Each year, it adjusted for its share of L'Oral's total profits and then deducted the dividends received. At the beginning of fiscal year (FY) 2017, the L'Oral stake was valued at $7.493 billion; at the end of FY 2017, the value was $8.228 billion (see Exhibit 2). 16

In a statement to analysts, Schneider pointed out that Nestl's stake in L'Oral had a 42-year annual return on investment of 12 per cent. For the period 2007-2017, the annual return on investment was 14 per cent. In addition, Schneider indicated that L'Oral dividends had accounted for 9 per cent of Nestl's earnings per share between 2007 and 2017.17

BRIEF HISTORY OF NESTL'S INVESTMENT IN L'ORAL

On April 2, 1974, France's president, Georges Pompidou, died in office. French voters were thus called upon to elect his successor. A coalition of left-wing and left-leaning parties led by Franois Mitterand appeared to be in position to come into power over the right-leaning group led by Valry Giscard d'Estaing.18

Over a decade earlier, in 1963, L'Oral had gone public, and Bettencourt, the founder's daughter, had retained a majority share of the company. Bettencourt had inherited the company upon her father's death in 1957.19 Both Bettencourt's father and her husband had been strong supporters of the French far right.20

Therefore, in 1974, Bettencourt feared that if left-leaning Mitterand came into power, her company (along with others) would be nationalized. As a pre-emptive move, Bettencourt decided to sell 30 per cent of L'Oral to the Swiss multinational corporation Nestl in return for a small stake in that company.21

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Bettencourt's rationale was that Mitterand's government would be less likely to nationalize L'Oral if it was partly owned by a Swiss company.22 However, in the 1974 elections prompted by Pompidou's death, French voters elected right-leaning d'Estaingnot Mitterand.23 Nevertheless, Nestl continued to own its stake in L'Oral. Peter Brabeck-Letmathe, who was Nestl's CEO until 2008 and chairman of the board until 2017, suggested that Nestl was in fact seeking to increase its stake in L'Oral.24

In 2014, buoyed by support from the French government, which regarded leading French companies such as L'Oral as national treasures, the L'Oral board of directors sought and obtained an agreement with Nestl that forbade it from attempting to increase its stake in L'Oral until at least six months after the death of Bettencourt. In addition, as part of the agreement, L'Oral bought back a part of Nestl stake, which dropped Nestl's ownership in L'Oral to 23.29 per cent.25 On September 21, 2017, Bettencourt died, which prompted the start of Nestl six-month moratorium on L'Oral shares.26

THIRD POINT

Founded by Daniel S. Loeb in 1995, Third Point was an "event-driven, value-oriented" hedge fund from New York City that had approximately $17 billion in assets under management at the end of 2016. 27 In the past, Third Point had mounted activist campaigns against companies such as Yahoo! in 2012 (when Loeb was instrumental in hiring Marissa Mayer as CEO)28, Sony Corporation in 2013,29 and Sotheby's in 2013 (when Third Point succeeded in getting three board appointees).30

On June 25, 2017, Third Point communicated publicly about its $3.5 billion investment in Nestl. In an eight-page letter to Nestl's investors, Loeb called for various changes at the Swiss company. In putting forth the rationale for the changes that he sought, Loeb made the following arguments:

Despite having arguably the best positioned portfolio in the consumer packaged goods industry, Nestl shares have significantly underperformed most of their US and European consumer staples peers on a three year, five year, and ten year total shareholder return basis. One year returns have been driven largely by the market's anticipation that with a newly appointed CEO, Nestl will improve

.

31

In addition to urging Nestl to publicly set a more ambitious productivity goal, the Third Point letter talked specifically about both reshaping the portfolio and monetizing the L'Oral stake. Third Point pointed out that Nestl owned over 2,000 brands in the food and beverage and in the health sciences categories, and that managing a large number of brands could lead to suboptimal capital allocation. The letter called for a review and eventual sale of underperforming brands and a simultaneous augmentation of the portfolio via "accretive, bolt-on acquisitions in high growth and advantaged categories."32

While acknowledging the contribution of the L'Oral stake over the years, Third Point was emphatic in demanding that Nestl sell its stake. The firm's rationale was that "having L'Oral in the portfolio is not strategic and shareholders should be free to choose whether they want to invest in Nestl or some combination of Nestl and L'Oral."33 Third Point reiterated this stand in its July 2018 letter:

It is clear that the Company's non-core financial stake in L'Oral should be sold since the Board remains unable to articulate a compelling long-term strategic rationale for its continued ownership. Nestl should use the proceeds from these [L'Oral and other suggested divestments] sales to do more M&A [mergers and acquisitions] in key areas or engage in expedited share buybacks.34

Third Point also provided a comparison of Nestl with its peers (see Exhibit 3).

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Page 4 9B19M125 THE "ELEPHANT IN THE ROOM"

In September 2017, shortly after being appointed as the company's CEO, Schneider laid out Nestl's strategy in an investor conference in London. In his presentation, Schneider stressed Nestl's identity as a global NHW company and indicated that portfolio management and capital allocation would be among his key priorities for the future.35 He indicated that his team would use four criteria for future acquisitions and divestments: fit with NHW strategy, attractive categories in terms of growth and margin, ability to win, and resource intensity (required capital and human resource investment).36

Schneider had already spearheaded two major portfolio moves. In December 2017, he had led the acquisition of Atrium Innovations Inc., a global leader in nutritional health products, for $2.3 billion in cash. The company had sales of around $700 million and boasted double-digit cumulative annual sales growth in the period 2015-2017. The second move was the January 2018 divestment of Nestl's US confectionery business for $2.8 billion in cash. The business had sales of approximately $900 million and had suffered negative cumulative annual growth for the period 2015-2017.37

In 2007, Nestl acquired Gerber Products Company (Gerber) from Novartis International AG for $5.5 billion in cash38 and folded it in its infant nutrition business. As part of the acquisition, Nestl acquired the Gerber Life Insurance Company (Gerber Life) business. Gerber Life sought to parlay the Gerber brand name among young parents to sell both term and whole life insurance policies. In FY 2017, Gerber Life accounted for CHF850 million in revenues. In an effort to stem declining sales growth, Nestl repositioned the Gerber baby foods brand as an organic option and supported the relaunch with a major marketing campaign. As part of the review of the Gerber acquisition, Schneider's team decided that Gerber Life was a non-strategic business for Nestl and indicated in mid-2018 that it was looking at all possible alternatives, including an outright sale.39

In an interview following the release of the financial results for the first half of 2018, Schneider defended the company's strategic direction:

Let me underscore my strong working relationship with our chairman. [The two of us are in] full agreement [on Nestl's current direction and are] unanimous in our commitment to analyze all aspects of our strategy. . . . As CEO, I have full authority to undertake this [strategic] analysis and implement the right actions to meet our objectives.40

However, Schneider and his team had yet to address Nestl's 23.2 per cent stake in L'Oral, which an analyst referred to as the "elephant in the room."41

1. Examine the arguments made by Third Point and Nestle on this issue. Whose arguments have greater merit?