By Svea Herbst-Bayliss and Uday Sampath Kumar
(Reuters) -Daniel Loeb's Third Point has built a significant position in toothpaste maker Colgate-Palmolive (NYSE:CL) Co and sees value in a potential spinoff of its Hill's Pet Nutrition business and other brands, the activist investor said in a letter seen by Reuters.
The investor letter did not disclose the size of Third Point's stake, but cited several reasons for investing in the consumer goods company, including its pricing power in inflationary conditions and the strength in its pet food business.
Loeb called the pet segment one of the most "exciting" pockets in the consumer space and said the business could be worth roughly $20 billion if it were a standalone company.
"There is meaningful hidden value in the company's Hill's Pet Nutrition business, which we believe would command a premium multiple if separated from Colgate's consumer assets," the letter said.
Sales in Colgate's pet nutrition business have outpaced overall company revenue over the last few years as consumers pay more attention to the needs of their cats and dogs. Pet adoption also jumped during the pandemic.
A spokeswoman for Third Point declined to comment but Loeb is expected to speak at the 13D Monitor Active-Passive Investor Summit in New York later on Tuesday when he may discuss the matter.
Shares of Colgate rose 3.6% in morning trading, after CNBC first reported the news.
With inflation rising at a sharp pace, Loeb said the Colgate investment makes sense because the business is "defensive" and has the ability to raise prices.
"We see shares compounding at a mid to high teens rate over the next several years just from earnings growth and the nearly 3% dividend," Loeb wrote, adding that any strategic actions around Hill’s or the consumer health sector "could add materially to our expected return."
While Loeb sounded a positive note on Colgate's portfolio, he also noted that earnings growth has been disappointing and that the stock price has underperformed.
He called on the board to take action at a time of increased activity in the consumer health sector. "Although the Board is fairly long-tenured and not known for making bold moves, we are confident that it will act in the best interests of shareholders if Colgate becomes part of the current M&A minuet in consumer health," he wrote.
Third Point, which invests in a variety of strategies including activism, has previously pushed big-name companies, including Walt Disney (NYSE:DIS) and Shell (LON:RDSa) to consider changes, including refreshing its board.
In addition to Third Point, another hedge fund, TOMS Capital Investment Management, has also done considerable research on what changes might make Colgate more profitable, people familiar with the matter said.