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Dan Loeb Photographer: David Paul Morris/Bloomberg

(bloomberg)

(Bloomberg) -- One year after buying a stake in Nestle SA and watching his holding lose value, activist investor Dan Loeb is running out of patience.

Third Point, the activist fund Loeb runs, fired off a 34-page presentation over the weekend, demanding a far more radical transformation than the world’s largest food company has so far embraced. Accusing Nestle of a “muddled strategic approach” that threatens its future, Loeb said the company should sell its valuable stake in cosmetics company L’Oreal SA and consider splitting into three units to spur growth. He also said Chairman Paul Bulcke is possibly obstructing change as the company needs more outsiders in management to shake up its “insular” culture.

With Nestle shares down about 10 percent since Loeb announced his $3.5 billion stake last year, Chief Executive Officer Mark Schneider is facing more pressure after having resisted the activist’s biggest demands. While he’s made some acquisitions and announced a major buyback, he’s not engineered the wholesale makeover that Loeb is now asking for.

“We do not believe that the company is living up to this mandate today with its muddled strategic approach and we are concerned that Nestle does not fully appreciate the rapidly occurring shifts in consumer behavior that threaten its future,” Loeb said in a letter to the company’s board Sunday.

In a statement Monday afternoon, Nestle said it’s on track to meet its 2020 goals for margin improvement, operating profit and structural cost savings. Without addressing Loeb directly, the company said its board and management “take all shareholders’ perspectives seriously and welcome their continued input.”

The stock rose 0.3 percent in afternoon trading Monday. L’Oreal fell 1.1 percent.

“There are too many examples of missed opportunities to claim that Nestle’s organization is well‐suited to today’s markets,” Loeb said in the Sunday letter. “We believe the company should simplify its overly complex organizational structure and split internally into three divisions organized around beverages, nutrition, and grocery to improve focus, agility, and accountability.”

Schneider’s main actions since he became CEO:

  • Set Nestle’s first fixed profitability target, aiming for an operating margin of as much as 18.5% in 2020 (still shy of what Loeb suggested and lower than Unilever’s)
  • Launched a 20 billion-franc share buyback program
  • Ended Nestle’s traditional guidance for sales growth after the company missed it several years, and promised that revenue will accelerate
  • Sharpened focus on Nestle’s coffee, pet-food, nutrition and bottled-water businesses
  • Acquisitions have included $2.3 billion for dietary supplements maker Atrium Innovations and $7 billion for the right to sell grocery products under the Starbucks brand
  • Divestment of 2% of revenue through selling the U.S. chocolate operations and planning to exit the Gerber insurance business

Loeb said the company hasn’t shown the necessary urgency since it released its own plan in September. Third Point also outlined its own strategy to improve Nestle in the presentation that calls for, among other things, divesting certain frozen-food brands and other products that don’t fit with its broader strategy.

“We believe Nestle should divest as much as 15 percent of sales either through sales, spin‐offs, or other methods to better align the portfolio around key categories. It is clear that the company’s noncore financial stake in L’Oreal should be sold since the board remains unable to articulate a compelling long‐term strategic rationale for its continued ownership,” he said.

Schneider has said that Nestle plans portfolio changes that will affect 10 percent of total sales. While selling the U.S. chocolate business, Schneider has said the company is committed to the category in the rest of the world, where its business is more profitable. Nestle has repeatedly resisted calls to sell the L’Oreal stake.

Loeb faces obstacles in his attempt to spur Nestle to change, according to James Edwardes Jones, an analyst at RBC Capital Markets. He said Third Point’s stake, which is about 1 percent, may be too small to force quick changes.

Chairman Bulcke presided over a “long period of underperformance, seems too comfortable with the status quo and may be holding up the pace and magnitude of change,” Loeb also wrote.

He said it’s “striking” that the board doesn’t include any members from outside with experience in the food and beverage industry.

Schneider, the first CEO to come from outside Nestle in almost a century, hasn’t made any major changes to top management. He has shown signs that the company no longer has sacred cows, however, with moves such as a plan to cut 500 jobs in Switzerland, the biggest restructuring the company has had in its home market.

Separately, the Wall Street Journal reported Monday that Nestle is in talks to buy a majority stake in Canada’s Champion Petfoods for more than $2 billion, citing people familiar with the matter.

(Updates with reference to Third Point in second paragraph, Nestle comment in fifth paragraph, acquisition-talks report in final paragraph.)

--With assistance from Lisa Pham.

To contact the reporter on this story: Scott Deveau in New York at sdeveau2@bloomberg.net

To contact the editors responsible for this story: Bernard Kohn at bkohn2@bloomberg.net, ;Elizabeth Fournier at efournier5@bloomberg.net, Thomas Mulier, John J. Edwards III

©2018 Bloomberg L.P.

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