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Morningstar | Campbell and Third Point Reach a Resolution, but Challenges to Righting the Business Still Loom

In advance of its annual shareholder meeting Nov. 29, wide-moat Campbell Soup announced it had come to a resolution with activist investor Daniel Loeb and his investment firm Third Point in their months-long proxy battle. As part of the agreement, Campbell will expand the size of its board to 14 members, adding Sarah Hofstetter (president of Comscore) and Kurt Schmidt (former director and CEO of Blue Buffalo) as directors. Further, Third Point will be involved in the selection of the company’s permanent CEO (which is to be announced by the end of the calendar year, following former CEO Denise Morrison’s abrupt decision to step aside in May, although the final decision will remain with the board) and another board member to be added by May 2019 (effectively bringing its base to 15 members).

We view the firm’s decision to put an end to this ordeal favorably. Because Campbell is a controlled company, with the Dorrance family (direct descendants of the man who invented the process by which wet soup is turned into condensed soup) owning about 40% of the outstanding shares and maintaining board representation, we had doubted that Loeb's pursuit would ultimately prove successful (at least to the extent he sought--replacing the entire board with a fresh slate of representation at the outset). However, we also think Campbell has already begun to take proactive steps to right the business (including its decision to sell its fresh and international operations--set to be announced by the end of the fiscal year--and extract excess costs to fund further brand investments), which we believe are prudent. As such, this announcement does little to alter our $45.50 fair value estimate or our Standard stewardship rating for Campbell.

With the proxy battle now in the rearview mirror, we think Campbell can focus its energy on the task at hand--improving the firm’s competitive position and ultimately its financial prospects. In this vein, Campbell is still pursuing a sale of its fresh and international operations, including the Kelsen and Arnott’s brands, which in aggregate generated $2.1 billion in fiscal 2018 sales (about one fifth of its consolidated base), a process that is expected to be completed by the end of fiscal 2019 (July year-end). From our vantage point, Campbell lacks the scale and reach beyond its home turf to profitably win with local consumers. We previously posited that expanding into natural and organics would aid in its efforts to diversify away from the stagnant center store. But in light of the challenges that Campbell has faced (particularly as it relates to carrot farming), we view its decision to operate with a more focused portfolio as prudent, especially given its stated intent to direct any proceeds to the paydown of debt, with leverage sitting at nearly 6 times at the end of fiscal 2018.

Further, we haven’t wavered in our thinking that Campbell’s integration of Snyder’s-Lance will not face the same difficult fate as its purchase of Bolthouse Farms. We maintain that snacking is a business that Campbell knows and understands well (particularly with its Pepperidge Farms and Goldfish brands), and we expect that it will be able to leverage this insight and distribution clout, enabling it to take advantage of consumers’ penchant for convenient, healthy fare. However, we also posit the combined entity could bolster the spending behind its brand mix to support its entrenched retail relationships and withstand intense competitive pressures. This underlies our outlook for Campbell to chalk up 2%-3% annual segment top-line gains longer term in a space that stands to account for about half of its mix, as well as our outlook for marketing to tick up to 5.4% of sales on average over the next 10 years versus 4.8% on average the last three years.