Nestlé SA in “talks” to buy majority stake in Champion PetFoods for over US$2b

CANADA – Nestlé SA, a Swiss transnational food and drink company, is in talks to buy a majority stake in Champion Petfoods LP for more than US$2-billion, according to the Wall Street Journal, citing people familiar with the matter.

Nestlé is under pressure to deliver faster growth in its portfolio of products and is looking to one of Canada’s most successful consumer-products companies as an answer.

The news comes as Nestlé is battling to convince investors that it has a long-term plan and push back against criticism from Dan Loeb.

Mr. Loeb, an activist investor whose fund Third Point took a US$3-billion position in Nestlé about a year ago, issued a public statement expressing dissatisfaction with Nestlé’s efforts and calling for “urgency” via a website.

“We are concerned that Nestlé does not fully appreciate the rapidly occurring shifts in consumer behaviour that threaten its future,” Mr. Loeb said in a letter to the Swiss company’s board.

To Mr. Loeb, the right approach includes selling off lower-growth businesses to focus on areas where shifting consumer tastes have led to sales gains − and high-end pet food qualifies.

Blue Buffalo Inc., a publicly traded purveyor of pet foods, sold in February for US$8-billion to food seller General Mills Inc.

Analysts who cover the publicly traded FreshPet Inc., which sells refrigerated pet food via major retailers, are beginning to put “takeout scenarios” into their valuations.

The Wall Street Journal added that Champion Petfoods would seem to be a natural fit, as its now in its fourth decade, to which it has grown from 12 employees to more than 500 thanks to an export program that has seen it sell its products in Europe and other global markets.

The company, owned by the Muhlenfeld family and Toronto firm Bedford Capital, makes “biologically appropriate” pet food, as close to what animals would eat in nature as possible, it says.

The Globe and Mail recently reported that the company says it manufactured to European pet food standards, among the strictest in the world, and embraced difficult regulatory regimes.

Instead of competing head-on with industry giants that have huge marketing budgets, Champion’s strategy has been to build relationships with distributors in each export market and use sales representatives to educate retailers and pet bloggers about their products.

“We continue to believe that there is a material opportunity for self-help at Nestlé despite persistent structural challenges to the company’s revenue growth … we believe little of this opportunity is reflected in the current valuation.”

Mr. Loeb’s ideas include Nestlé selling its 23-per-cent stake in L’Oréal and using the proceeds for M&A or share buybacks; reorganizing into three internal units; and divesting businesses that make up to 15 per cent of sales.

Nestlé said it’s on track to meet its 2020 goals for margin improvement, operating profit and structural cost savings.

Without addressing Mr. Loeb directly, the company said its board and management “take all shareholders’ perspectives seriously and welcome their continued input.”

Nestlé has recently sold its struggling U.S. confectionery business to Italy’s Ferrero and agreed to take control of selling Starbucks packaged coffees around the world.

It has also invested in small, faster-growing brands including Freshly, Sweet Earth, Blue Bottle Coffee and Chameleon Cold-Brew.

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