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Pitch books on Campbell Soup have piled up for years. Most of them are unused.
Activist hedge fund Third Point pulled out one of the oldest — sell the whole business. Founder Dan Loeb wants to oust the company's entire board to move forward on this plan. But maybe Campbell is better suited for another option: shed the company's many brands and take the soup business private. That's an option bankers have pondered for years.
Things aren't going well for one of America's oldest soup companies. Sales for Campbell's soup business plummeted 14 percent this past quarter. Its shares are also down, having dropped 24 percent since January. The company has delivered a 19 percent total shareholder return while the S&P 500 has nearly tripled over the last two years. It's grappling with debt-load that is counter to the company's typically conservative philosophy.
But Campbell is the No. 1 U.S. soup brand with an iconic heritage. Even with the sales decline, it last year generated roughly $600 million in cash*. Its 30 percent margins are enviable**. That profit helps support Campbell's iconic brands, like Pepperidge Farm cookies and Goldfish crackers. But it hasn't been enough to appease public investors, who crave growth and activist agitators like Loeb, who demand a quick turnaround.
Taking Campbell's soup business private would give the company's founding family a reprieve to feast off its cash flow and iconic stature with less public pressure. The company could save the millions of dollars it and all publicly traded companies spend on securities filings, controls and accounting. It could avoid costly acquisition mistakes, throwing the soup businesses' cash flow toward risky bets on growth, trying to give public investors what its soup business cannot.
Campbell paid $1.55 billion for carrot and smoothie company Bolthouse Farms in 2012, looking to jump on the fresh food trend. It's now selling Bolthouse, along with its other fresh food businesses, after struggles due to inexperience and an ill-timed drought. The fresh food unit posted an operating loss of $7 million last quarter.
Campbell last year paid $6.2 billion for pretzel and chip company Snyder's-Lance looking for growth in snacks. The soup company continues to stand by the deal — interim CEO Keith McLoughlin told analysts in August that the company is "even more convinced of the growth prospects and synergies." But it more than tripled Campbell's debt burden. It brought with it a business that will be challenging to integrate.
There was concern from the onset about the leverage the company took on to fund the deal. Yet there were few assets left for Campbell to buy that were both growing and of scale, a person familiar with the deal tells CNBC.
As a private company, "You can say, we're not going overpay for acquisitions … we're going to throw off a lot of cash because we are happy to be slow growth," said Erik Gordon, business professor at the University of Michigan.
Campbell could use some of the cash it saves by avoiding such deals to invest in its soup business. The business is profitable, but it still needs investments, like new equipment to make its soup healthier. Condensed soup is Campbell's past, it is not its future. Under pressure to deliver quarterly results, Campbell has been slow to innovate its soup business, simply countering slowing demand with higher prices. As result, its canned soup now lacks the clout with consumers to command the pricing it wants, hurting its relations with major retailers like Walmart, people familiar with the business have said.
"Soup is a great business and Campbell's is an iconic brand," said McLoughlin on the company's quarterly earnings call in August.
"[But] the business has been over-relied upon to generate earnings and has been underinvested in. In recent years, we have pushed the business too hard on pricing and margin and we did not do enough to keep our soup products and brands relevant with consumers."
All the while, private companies like Kind Bar and Chobani have built up multibillion-dollar, privately owned food companies, where they have been able to invest and make mistakes out of the public eye.
Candy maker Mars, another iconic U.S. food brand, has transformed itself. The company, entirely owned by the Mars family, generates roughly $35 billion in sales from its M&Ms, Snickers and pet food. It's made bets for which public investors would unlikely to have had the patience, like paying $9 billion for animal hospital company VCA. That deal was not a quick play for growth, but part of the long-term foothold Mars is planning across the pet industry.
Third Point, which has demanded a sale of the company, declined to comment.
Campbell Chairman Les Vinney said in a letter sent to shareholders last week that the company is "confident" in its "new strategic direction," adding the board will "continue to seriously consider other strategic options." Vinney reiterated Campbell's statement that the company thoroughly evaluated the option of selling itself during a review earlier this year.
To get into the hands of private investors requires first peeling off the other businesses Campbell has accumulated in its quest for growth through deals.
It already plans to sell its fresh food and international snacks business, the latter of which industry bankers expect will generate between $2 billion and $3 billion in cash. It plans to use those proceeds to pay down debt.
Campbell expects to send out materials for its snack business to potential buyers in the next few weeks, people familiar with the situation said. It will begin to sell its fresh food business after that.
Next, Campbell could spin out its crown jewel snack business, which includes Pepperidge Farm cookies, Goldfish crackers and Snyder's-Lance pretzels. The unit contributes 35 percent of Campbell's sales growth, according to Factset. It's unclear if there is a buyer for the unit, but it could operate as a stand-alone business. It would therefore echo a move by Kraft in 2012, when it spun out its cookie and cracker business to form Mondelez, separating it from its slower-growing grocery business.
Both Mondelez's and Campbell's snack businesses deliver the growth that public investors crave. Snacks like Goldfish and Oreos have international appeal. Shares of Mondelez have fallen nearly 2 percent over the past year, but even a small decline beats the larger drops seen by other middle of the grocery store staples, like Kraft Heinz and General Mills.
Assuming its snack business has roughly $430 million in earnings before interest, taxes, depreciation and amortization after selling its international snacks business, it could fetch a valuation of $7.3 billion based on Mondelez's current multiple, people familiar with the industry said.
That leaves it with a soup business that last year produced $1.14 billion in EBITDA*. Assuming investors pay the same 13 times EBITDA multiple for the soup company that private equity firm 3G Capital paid for Heinz in 2013, a deal based off last year's numbers would cost $14 billion. (The acquisition by 3G of Heinz serves as a useful benchmark for assessing what a private equity firm might pay for a public food company, but the food industry has gotten significantly harder over the past five years. Valuations for such deals have likely tempered.)
The soup business could support leverage of about 7.5 times debt, said industry bankers. The starting point for that leverage would depend on the proceeds from its pending divestitures and a hypothetical Pepperidge Farm spinoff.
While Campbell has been punished for its 5.5 times debt load** by public investors, private investors are more willing to tolerate debt risk. Private investors, like private equity firms, have ample experience managing a leveraged company. The steady cash flow and wide margins of Campbell's soup business suit the profile of a business to which banks are often eager to lend, said industry experts.
The remaining equity check could be lessened if the Dorrance family, which owns roughly 40 percent of the company, rolls over their ownership into a new company.
Once private, Campbell could stay so in perpetuity. Its owners, the Dorrances and their partners, could bounce between paying down debt with free cash flow and taking out money through recapitalization, much like the dividends on which the Dorrance family has been relying on for the past 64 years.
That all sounds nice — but that's the beauty of a pitch book. It doesn't need to be hampered by emotions, resistance to change and the reality of uncertainty.
But even fiction can make for a good read.
*For ease of analysis, calculations around Campbell's soup business also include a few other brands like Prego pasta sauce and V8 vegetable juices.
**According to industry banker and equity analyst estimates
***According to Fitch Ratings