Activist investor Third Point LLC on Sunday, June 25, unveiled its latest target: Swiss food giant Nestle SA.

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

Third Point, the hedge fund run by Dan Loeb, wrote in the letter that it owns about 40 million shares of Nestle and that its position, including options, is worth over $3.5 billion, or about 1.3% of Nestle's total market capitalization of 255.51 billion Swiss francs ($263.5 billion).

"Despite having arguably the best positioned portfolio in the consumer packaged goods industry, Nestle 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," the firm wrote, with one-year returns artificially bolstered by optimism regarding new CEO Ulf Mark Schneider, who was appointed June 27 and began his tenure Jan. 1.

"While Nestle has stood still, its peers have pursued productivity increases aggressively and made other changes in order to deliver earnings growth and create shareholder value in a slower sales growth world," Third Point wrote, claiming that Nestle has failed to adapt to "changes in consumer tastes and shopping habits, as well as an influx of new competition from smaller, local brands" and that poor growth has shrunk dividends.

Nestle is a classic Third Point target, the firm wrote, as "a conglomerate with unrealized potential for margin improvement and innovation in its core businesses, an unoptimized balance sheet, a number of noncore assets, and a recent history of meaningful under-performance versus peers." Similarly, Loeb is pushing for change following the planned $130 billion merger of Dow Chemical Co. (DOW) and DuPont Co. (DD). Dow and DuPont plan to split in three following the close, but Loeb said in a recent letter that he questioned whether "three spin-off companies is appropriate or if the creation of additional businesses or divestitures would further enhance shareholder value." 

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Advising Third Point on its investment is Jan Bennink, former CEO of baby food company Royal Numico NV, which Groupe Danone SA acquired in 2007 for $16.75 billion. Bennink also served as executive chairman of Sara Lee Corp. and oversaw its 2012 split into two companies, meat company Hillshire Brands Co. and coffee and tea company D.E. Master Blenders 1753 NV. D.E. Masters sold to an investor group led by Joh. A. Benckiser GmbH, now known as JAB Holding Co., in 2013 for $9.8 billion, while Hillshire sold to Tyson Foods Inc. (TSN) for $8.55 billion the following year.

Bennink has "invested a significant personal sum" alongside Third Point, the firm said, touting his "direct operating experience in four of Nestle's key categories: coffee, baby food, medical nutrition, and dairy."

Among Third Point's suggested changes at Nestle, which the firm said it has articulated to the company's management "in productive conversations," are a formal margin target of 18% to 20% by 2020 (up from 16%), doubling Nestle's leverage to facilitate buybacks, a "comprehensive portfolio review" and selling its 23% stake in L'Oreal SA, worth about €24.18 billion ($27.1 billion).

Nestle announced June 15 that it's exploring strategic options, including a sale, for its U.S. confectionery business, which could fetch over $1 billion, a move that Third Point said is encouraging.

Third Point's Nestle investment comes less than a year after the firm fully dissolved its stake in another unwieldy food giant, Kraft Heinz Co. (KHC). Kraft Heinz epitomized the low growth in the packaged food business earlier this year with its unsuccessful attempt to acquire Unilever NV for $143 billion in February. Loeb's recent targets have tended toward the manufacturing and industrial segments, including an April campaign for Honeywell International Inc. (HON) to spin off its aerospace unit.

"We are confident that by following the path we have outlined, Nestle will be able to revive its iconic slogan, with a twist: Nestle makes the very best returns for its shareholders," Third Point concluded.

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