(Adds Nestle could not be reached for comment in 4th paragraph)
By Michael Erman
June 25 (Reuters) - Activist investor Daniel Loeb's Third Point LLC on Sunday unveiled a stake of more than 1 percent in Switzerland's Nestle SA and urged the world's largest packaged foods maker to improve its margins, buy back stock and shed non-core businesses.
The 3.28 billion Swiss francs ($3.4 billion) stake is the largest ever taken by the hedge fund, which pressed for change in recent years at U.S. internet firm Yahoo and Japan's Sony Corp.
Third Point disclosed the Nestle position in a letter to the hedge fund's investors, in which it argued the food company should sell its 23 percent stake in French cosmetics firm L'Oreal SA. It said in the letter that it has already had productive conversations with Nestle management.
Nestle could not be immediately reached for comment.
Nestle is the biggest player in a packaged food industry struggling with a slowdown in emerging markets, falling prices in developed markets and consumers demanding fresher, healthier products.
Mark Schneider, the company's new chief executive, has been trying to reignite growth at the company since joining Nestle in January from German healthcare group Fresenius.
In February, he scrapped Nestle's longstanding sales target as it reported disappointing annual results, echoing rivals by striking a cautious tone.
"We feel strongly that in order to succeed, Dr. Schneider will need to articulate a decisive and bold action plan that addresses the staid culture and tendency towards incrementalism that has typified the company's prior leadership and resulted in its long-term underperformance," Third Point wrote in the letter.
The hedge fund said that Nestle should set a formal margin target of 18 percent to 20 percent by 2020 in order to help improve productivity. It also recommended it more than double its debt load, as well as sell the L'Oreal stake, in order to generate the capital to buy back stock.
Third Point's roughly 40 million shares in Nestle would make it the company's eighth-largest shareholder, according to Thomson Reuters data. Third Point's stake was first reported by Bloomberg.
Jan Bennink, former CEO of baby food maker Royal Numico, is advising Third Point on its Nestle investment and has also invested personally alongside the fund, Third Point said.
Nestle said earlier this month that it might sell its $900 million-a-year U.S. confectionery business in its latest effort to improve the health profile of its sprawling portfolio.
Nestle's shares closed at 82.10 Swiss francs on Friday.
Additional reporting by Parikshit Mishra in Bengaluru; Editing by Adrian Croft, Andrew Hay and Bill Rigby