Glenboden M & A Originations

Campbell's should make a bigger acquisition

Priority Rating priority rating 4
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Origination Status origination after investors' day, July 2015
Asset candidates include Pinnacle, Flowers, B&G
Buyer Campbell Soup Company (USA), leading domestic grocery foods group with global presence
Seller private equity and public shareholders of Pinnacle, Flowers, B&G
Buyer Rationale scale and synergies in ambient grocery in the US
Seller Rationale acceptable valuation
NBs an alternative strategy is to acquire a sustainable foods player like Hain Celestial
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Campbell's is one of those US ambient foods groups whose name continuously comes up as an acquisition target. With its recent decline in sales, that speculation could grow. However on balance we think Campbell's may survive this cycle's M&A activity, and indeed should seek to acquire companies in growing categories or for increased scale and synergies.

Growth more potential than actual ...Campbell's talks the talk about plans to expand into higher-growth categories and geographies. The reality however is that the group's top line has been stagnant in recent years (see profile).

The group's management seems resigned to the stagnation continuing, having recently reduced its sales outlook down to 1-3% per annum, from a previous target of 3-4%.

To make things worse, Campbell's sales revenue declined by as much as 4% in Q3 2015 overall, and by 6% in its most core business, US simple meals, including a 10% drop in sales of its iconic branded soups.

... but protected by high margins ...In this context, Campbell's could appear as an acquisition candidate. However, the group also delivers an EBITDA margin of over 18% (see profile). It also has a target of annualised cost savings of US$ 250 mln, which would push that margin above 20%, which is high for an ambient grocery producer.

With that level of profitability, it would be hard for a 3G or a Nomad to convince Campbell's shareholders that the group is underperforming. They would also need to offer a very high price, given Campbell's current stock trading valuation of nearly x12 EBITDA (see valuation).

On top of that, the most likely buyers are arguably not ready to take on Campbell's. 3G is still digesting its merger of Heinz with Kraft, as well as trying to justify a very high valuation of the latter. Nomad is focused on frozen foods and the merger of Iglo with Findus in Europe. Other candidates are either too small or too indebted.

... happy just to coast along ?With its high profitability and cost cutting plan, as well as treasury stock purchases, consistent divident payments and now increased earnings per share guidance, it's easy to conclude that Campbell's management is keeping its shareholders happy.

On the other hand, an activist shareholder could complain that the group's management is too conservative, and missing out on opportunities to grow the business through acquisitions. It's true that Campbell's indebtedness is quite low now (see profile). It could raise nearly US$ 3 bln in additional debt capital, for acquisition purposes, and still keep its net debt ratio below x4 EBITDA.

Instead Campbell's has been relatively quiet on the M&A front in the last few years - US$ 331 mln out of the door to buy Kelsen in 2013, then in the same year US$ 548 mln back through the door, when the group sold its European simple meals business. They've now just bought Garden Fresh Gourmet, but that's a company with only US$ 100 mln in turnover.

Fresh products unattractive ...The obvious area for acquisitions is fresh products, especially now that Campbell's has split out a new packaged fresh division, for reporting purposes, that includes chilled carrots, super-premium beverages, salad dressings and refrigerated soup.

However, in our view those aren't categories with particularly exciting prospects in terms of scale or profitability. In fact, fresh products are generally lower margin than ambient foods are. Just look at the EBITDA margin delivered by Chiquita or Del Monte, then compare it to that of Campbell's.

The group would be better served, in our view, by making acquisitions that increase its scale in its existing core businesses, namely centre of store simple meals, baking and snacking and beverages. Alternatively, acquisitions in sustainable foods such as organic.

... several candidates in its core business ...There are a number of branded ambient, centre of store grocery players in the US that are smaller than Campbell's, but would give it significantly more scale and potential for synergies in manufacturing, supply chain, sales & marketing.

Where to begin ? How about Pinnacle Foods, which has been majority owned by private equity firm Blackstone since 2007 and so presumably is for sale if a potential buyer appears. That would add US$ 2,5 bln in sales to Campbell's, expand its grocery offering and take it into frozen foods ('Bird's Eye' brand).

Other candidates might include Flowers Foods, which would add nearly US$ 4 bln in sales and greatly expand Campbell's bakery products offering. If that's too expensive for the group, then a smaller alternative could be B&G foods, which would provide Campbell's with a stable of new brands.

... sustainable foods more excitingAnother strategic option, which would be more of a growth platform story than the candidates above, would be sustainable foods like organic or other segments that are better for people or for the planet.

In that space, Hain Celestial would add more than US$ 2 bln in sales revenue, and a strong growth trajectory, in grocery products, snacks, tea and personal care products. Hain grew its top line by nearly 25% in 2014 alone.

Such an acquisition would transform Campbell's from being a sleepy, stagnant grocery foods company, to being an exciting, high growth business with a future as a leading natural, organic and better-for-you player.

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Size (€ mln) 23 000
Sector grocery products
Asset Quality US leader branded
Seller large plc
Buyer private equity
P/S 3,0
P/Ebitda 16,0
Type enterprise value estimate
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