No news can sometimes be good news. Unilever and Nestle, two of Europe's biggest consumer giants, managed to report sales growth that broadly matched analyst estimates on Oct. 18.
That was exactly what they needed: both are vulnerable if they stumble. A misstep at Nestle could strengthen the hand of an activist investor; at Unilever, it could attract one.
The pair is struggling with lackluster sales growth as consumers turn to smaller, often more millennial-friendly products, and growth in emerging markets slows. Of the two, Marmite-maker Unilever is under the greater pressure to produce better operating results after promising to revive its performance after spurning a generous takeover approach.
After successfully fending off Kraft Heinz Co. last year, the Anglo-Dutch conglomerate had planned to simplify its structure into a single holding company in the Netherlands, a move that would have given it more scope to grow through M&A. This month, CEO Paul Polman had to abandon that plan amid opposition from big U.K. shareholders.
Unilever has been partially protected by the sharp fall in Kraft Heinz's share since it abandoned its $143 billion offer in February 2017. It can’t count on this forever. Any drop in performance could encourage an activist investor to barge in and agitate for another takeover approach. Given the ill-feeling the botched relocation generated, investors may be open to a change of ownership.
Nestle, owner of the Kit Kat bar and Nespresso, is in a stronger position. CEO Mark Schneider, now in the job for almost two years, is attempting to steer a steady course between chasing profit at the expense of the top line growth, and profitless revenue growth. So far, he seems to be navigating this delicate balancing act. The departure of Asia head Wan Ling Martello – tipped as a possible successor to Polman – is unhelpful, but not enough to throw Schneider off course.
Even so, he can't afford a misstep. In July, activist Dan Loeb's called for him to speed up the pace of disposals. Since then, Schneider has announced the sale of the Gerber Life Insurance business for a better-than-expected price of $1.55 billion and is considering offloading Nestle's skin health business.
Loeb also wants Nestle to divest its 24 billion-euro (US$28 billion) stake in L'Oreal SA – something Schneider has so far resisted. Any operational weakness could give the activist motivation to push even harder, by, for example, seeking a board seat.
Unilever's shares have fallen 13% over the past year, underperforming Nestle, which is down by almost 7%. The Anglo-Dutch group trades at just over 18 times estimates earnings, slightly less than Nestle's multiple of 19 times.
That looks fair. Even with the surprise management change, Nestle looks to be faring better and has so far avoided the self-inflicted wounds that appear to be its rival's specialty.
By Andrea Felsted