Food & Beverage

Campbell Soup plans to sell international and fresh food businesses, remains 'open' to sale

Key Points
  • Campbell Soup reveals its plans to turn around the company after announcing a top-to-bottom strategic review in May.
  • The company is selling its fresh food business, including Bolthouse Farms, as well as its Arnott's and Kelsen brands overseas.
  • Activist shareholder Dan Loeb is calling for Campbell to sell itself.
The end of Campbell Soup?

Campbell Soup said Thursday it is selling its international and fresh food businesses as the 149-year-old condensed-soup maker struggles to regain its financial footing and refocus on its signature packaged foods.

The company is unwinding efforts by former CEO Denise Morrison to branch into healthier and more fresh foods to double down on product lines it knows well — snacks, meals and beverages. Morrison's surprise departure was announced in May when the company said it was conducting a top-to-bottom review of its holdings after releasing what executives called "unacceptable" earnings.

The board considered a "full slate of strategic options, including optimizing the portfolio, divesting businesses, splitting the company, and pursuing a sale," Campbell's interim CEO Keith McLoughlin said in a statement. The board concluded that the "best path forward" is to "focus the company on two core businesses in the North American market," he added.

Executives said the company was chasing too many initiatives at once and had little reason or justification to get into fresh food, where it had little experience and no reputation.

"We depended too much on M&A to shape our business strategy," McLoughlin told analysts Thursday morning in an extended 90-minute conference call to discuss its plans.

Its legacy businesses, though, are challenged and mature. Sales in Campbell's U.S. soup business during its fiscal fourth quarter ended July 29 plummeted 14 percent, with it no longer able to simply raise prices to counter shrinking demand, the company said in its earnings release Thursday.

After it sells off the units, Campbell's anticipates earnings of $2.45 a share to $2.53, a nominal increase from $2.40 a share to $2.50 without those sales.

Against that backdrop, McLoughlin stressed several times on the call that the company continues to evaluate all options as it moves forward. In doing so, he left a clear door open to a potential sale in the future.

Campbell has been under pressure from activist shareholder Third Point, which has previously called a sale the only justifiable outcome of the review. When the company announced its review in May, it sparked speculation the process could end in a sale.

Warren Buffett, the CEO of Berkshire Hathaway, dampened speculation that Kraft Heinz would make a play for Campbell Soup, saying on Thursday it is "very hard" to offer a premium for a packaged food company.

Buffett made his comments in an interview with CNBC's Becky Quick ahead of his annual lunch with the winner of the Glide auction at Smith & Wollensky steakhouse in New York.

Buffett, along with private equity firm 3G Capital, is an investor in Kraft Heinz. The ketchup maker has been cited as a logical buyer of Campbell, which activist investor Dan Loeb's Third Point has been pressuring to sell.

The company, which also makes SpaghettiOs, Prego sauces and Goldfish snacks, said it was also raising its overall cost savings target to $945 million by fiscal 2022.

Campbell shares were down more than 2 percent in afternoon trading. The company on Thursday also announced better-than-expected quarterly earnings but disappointing revenue.

Unwinding fresh foods

The sales of Campbell's fresh food business, which includes Bolthouse Farms, as well as its overseas brands Arnott's and Kelsen will help pay down the debt left behind from its $6.1 billion acquisition of pretzel maker Snyder's Lance earlier this year. CNBC previously reported the company was looking at selling the units to pay down debt.

The acquisition of Snyder's more than tripled Campbell's debt burden to $9.6 billion at the end of the most recent quarter, from $3.1 billion a year earlier. It was one of a series of deals in the past year in which a food giant paid a big price to buy one of the few food brands that are both growing and big enough to make a dent.

Moody's Investors Service cited the company's high leverage ratio as a problem and questioned its ability to pay down that debt when the ratings company placed Campbell's bonds on review for a possible downgrade in May.

The fresh food unit posted an operating loss of $7 million this quarter, still less than its $8 million loss the prior year.

Brands such as Bolthouse Farms could attract interest from both private equity buyers and companies that have more experience managing fresh food, according to people in the industry.

Australian biscuit brand Arnott's may similarly attract both private equity firms and corporate buyers. It could command a price tag of roughly $2 billion, say those people.

The logo for Campbell's Soup appears above a trading post on the floor of the New York Stock Exchange.
Richard Drew | AP

Third Point pressure

The potential divestitures are likely to do little to appease Third Point, which recently disclosed a 5.65 percent stake in the company and called a sale of the business the "only justifiable outcome" of its review. The activist is teaming up with shareholder George Strawbridge, a descendant of founder John P. Dorrance, to call for the sale.

Strawbridge had his own stint on the Campbell board, on which he served from 1988 to 2009. A businessman in his own right with ventures that include a stake in the NHL's Buffalo Sabres, Strawbridge was active and quizzical while on the board, according to a person who sat in on the meetings.

For Third Point to agitate for a sale, it would need to win over enough support from the family. The descendants of Dorrance — the man many say invented condensed soup — have multiplied across many different clans over the years, and they weren't all in agreement over whether to sell, sources have told CNBC.

Mary Alice Dorrance Malone is Campbell's largest shareholder, with a 17.7 percent stake in the company. Her brother, Bennett Dorrance, has a 15.4 percent stake. Other descendants hold a combined 7.9 percent of the company in the Campbell Soup voting trust.

Without a sale, Loeb and Strawbridge may push for a full turnover of the Campbell board, all of whom come up for re-election this year.

"Only a reconstituted board, free of the need to defend past actions and other legacy issues, will be able to objectively explore all strategic alternatives, including a sale of [Campbell] or other business combination, that would substantially increase the value of the [Campbell's] shares," wrote Strawbridge in a recent filing.

Doing so could mean the ouster of the three soup heirs from the board: Bennett, Mary Alice and their nephew Archie Van Buren. Van Buren is the only one who has worked at the company for a prolonged period, giving him unique insight into its business.

Correction: This story was revised to correct that the Buffalo Sabres are in the NHL.