EUR 850.00 For Business Accounts Only

Morningstar | Campbell Closes the Book on Its Fresh Expansion With Sale of Bolthouse Business; Shares Attractive

Following through on plans initially laid out in August, wide-moat Campbell Soup has inked a deal to sell the remaining piece of its fresh business, which had accounted for around 10% of sales, wrapping up what has arguably been a tumultuous foray into the natural and organic category, plagued by volatile sales and muted profits. In a deal that is expected to close by fiscal year-end in July, Campbell is to receive $510 million in proceeds for its Bolthouse Farms segment from Butterfly Equity, where the former founder of the operations is employed. When combined with the sale of Garden Fresh Gourmet, which was announced in February, it doesn’t appear Campbell cooked up an attractive multiple for these assets (0.6 times sales, which pales in comparison to the 2-3 times sales multiple we estimate has been expended on past industry tie-ups based on data from PitchBook and company filings).

However, we attribute this to the degradation in the business since Campbell acquired it in July 2012 for $1.55 billion, which equated to 2.2 times trailing 12-month sales, a valuation that we considered modestly rich at the time. We never believed that the addition of Bolthouse would remedy the challenges Campbell faced in its core operations, which have yet to subside, but that it offered diversification benefits away from the stagnant center of the store, where competitive pressures abound. However, 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 the intent to direct any proceeds toward paying down debt, with leverage sitting at nearly 6 times at the end of fiscal 2018. While we will review our valuation assumptions, we don’t intend to materially alter our $45.50 fair value estimate and view shares as modestly undervalued, trading at a 13% discount.

A year since former CEO Denise Morrison abruptly stepped down, we think further change is likely as Campbell works to steady its ship. More specifically, Campbell is still pursuing the sale of its international operations, which primarily consist of more desirable snacking brands that could garner a low-single-digit multiple to sales, or around $2 billion to $3 billion. From our vantage point, the decision to turn its focus onto its core U.S. business stems from the fact that Campbell has lacked the scale and reach outside its home turf to profitably win with local consumers. Beyond reducing its leverage, we also believe that a more narrowly focused brand mix should enable Campbell to more effectively hone its resources (both financial and personnel) on the highest-return opportunities, which is essential as Campbell goes to bat against other nationally branded operators, lower-priced private-label fare, and small niche peers daily.

In terms of recent changes at the top, we surmise that industry veteran CEO Mark Clouse, who most recently held the top spot at Pinnacle Foods before its acquisition by Conagra earlier this year, seems intent on getting Campbell back to basics, highlighting his commitment to investing behind its brands while maintaining a disciplined bent toward costs. We expect it will take more time for Clouse to get his hands around the business and ultimately craft the course he believes is best, which should be disclosed at the firm’s investor event in mid-June, but we’re encouraged that Campbell has already begun to take proactive steps to right the business.