Cultural mix a hidden weapon in Nestle CEO's activist defense

By Martinne Geller

LONDON (Reuters) - Growing up in Germany, Mark Schneider was pushed to become fluent in English by his father, who believed it would give him an edge.

Now as Nestle's relatively new chief executive, the 52-year-old's abilities are being put to the test by an activist U.S. investor pressing him to act faster and more forcefully to raise the Swiss company's profit.

Billionaire hedge fund manager Daniel Loeb's Third Point is urging steps it says can boost margins and double earnings per share at the world's biggest food company by 2022.

Years spent in the United States landed Schneider dual German-U.S. citizenship and a Harvard MBA. Combined with a PhD from the Swiss university of St. Gallen and 13 years as CEO of a German firm, he has the experience to balance the measured European shareholder approach and American-style activism, analysts say.

"Schneider can hopefully bring both of those things to his role," Kepler Cheuvreux analyst Jon Cox said, adding that if he fails to deliver on his strategy, the maker of Gerber baby food and Nescafe could face calls for a break-up.

Third Point sent a letter to the board and published a 34-page presentation on recommendations for Nestle this week but has not given a deadline for the changes, which include selling its L'Oreal stake and reorganizing into three business units.

Sources familiar with the matter say the fund had several interactions with Nestle in the past year since becoming a top 10 shareholder. The next meeting, set for autumn, had already been scheduled prior to this week's action, one source said.

As the first outsider to become Nestle CEO in almost a century, Schneider has impressed investors with his candid assessment of the company's problems and lightened the mood at its Lake Geneva headquarters, often seen wearing open-necked shirts and eating in the staff cafeteria.

MARGIN IN FOCUS

Schneider's track record is strong. At the helm of German healthcare company Fresenius , he oversaw merger and acquisition (M&A) deals that brought a twelvefold increase in net income.

But industry-wide troubles like changing consumer habits, economic uncertainty and upstart rivals have taken their toll on Nestle, and analysts say its spotty M&A record, sprawling structure and occasional arrogance have not helped.

Some people think the external pressure from Third Point, which owns about 1 percent of Nestle's shares, may actually help Schneider as he tries to shake up the Swiss company's corporate culture, as well as improve sales and earnings growth.

"Every investor in Nestle wants them to get the margins up a bit faster," said Ali Miremadi, a fund manager at GAM Investment Management, which owns nearly $73 million of Nestle shares, Reuters data shows.

"That's also what the chief executive and the board want."

Schneider has begun with frequent, incremental changes, while avoiding a big bang such as selling Nestle's 23 percent stake in L'Oreal, which Third Point and others advocate.

In 18 months, he has made nine acquisitions and 11 divestitures, mostly very small, and has restructured parts of the business in a bid to boost profits. However, he is wary of inflicting the harsh cost cuts seen among some U.S. food groups in a trend that spread to Europe alongside Kraft-Heinz's failed bid for Unilever last year.

Kraft did not succeed partly because the preoccupation with profit it inherited from shareholder 3G Capital was seen as clashing with the Anglo-Dutch firm's stakeholder approach.

Jefferies analysts described a similar kind of "culture war" between Nestle and Third Point and predicted that Nestle would change, but at its own pace.

CHANGING THE GUARD

Although hiring Schneider was a break with tradition for Nestle, which historically promoted CEOs from within, Third Point has identified the continuing influence of its Chairman Paul Bulcke as a potential problem.

Former CEO 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," Third Point said in its presentation.

Nestle, which declined to comment, this week issued a statement defending its performance.

And longtime shareholder Thomas Russo, of Gardner Russo & Gardner thinks the old guard understands exactly how much things have changed and wants a strategy to match.

"That's why they brought in Mark ... they didn't bring him in because they thought it would be fun to break with the culture of internal appointments," Russo told Reuters.

Schneider is one of a few relatively new executives at Nestle, whose CFO Francois-Xavier Roger, a Frenchman, joined from Takeda Pharmaceutical in 2015, replacing Wan Ling Martello, an American, now head of Asia, Oceania and sub-Saharan Africa, who joined in 2011.

New independent directors, including Kasper Rorsted, who joined Adidas as CEO from German packaged goods maker Henkel , are also likely to bring a fresh eye.

Rorsted, also with feet on both sides of the Atlantic as a Danish national and Harvard Business alumnus, had success turning around Adidas and Henkel in the United States.

"The new blood has started to overpower the old guard," Vontobel analyst Jean-Philippe Bertschy said.

For investor Christopher Rossbach, chief investment officer at J. Stern & Co, Schneider would not have moved to Nestle if he feared being hamstrung by tradition.

"(He) will not be hindered in his implementation of his strategic vision," Rossbach said. "The reality is that a lot of these initiatives are long-term by nature ... The question is if Third Point can wait that long."

(Additional reporting by Svea Herbst-Bayliss in Boston, Silke Koltrowitz in Zurich, Emma Thomasson in Berlin and Sinead Cruise in London; Editing by Georgina Prodhan and Alexander Smith)