Campbell Soup in $1.55B deal for Bolthouse carrots

(Update with analyst comment) Shares of Camden-based Campbell Soup Co. slipped as much as 1% in early trading after the Camden-based canned-soup maker said it would pay $1.55 billion for Bolthouse Farms, a California-based carrot grower and juice and salad distributor, to its owner, buyout firm Madison Dearborn Partners.

Bolthouse and its organic-juice lines are growing faster than Campbell and its soups and V-8 juice, but Campbell's profit margin of around 15% (higher for soup) is going to be weighed down by Bolthouse's 13% margin, analyst Jonathan Feeney told clients at Janney Capital Markets in a report today.

During its past fiscal year Bolthouse said it grossed profits of $92 milllion -- before paying interest and taxes - on sales of $689 million.

Campbell CEO Denise Morrison said she would run Bolthouse as a stand-alone company under current Bolthouse boss Jeff Dunn. Like her predecessors, Morrison has been trying to boost Campbell profits in the face of weak canned-soup sales. It's a good time to borrow money (rates are low), but Bolthouse's fresh-carrots business (half of total sales) is weather-sensitive and thus more volatile than prepared-foods sales, Feeney added. 

The financial accretion
($0.03-$0.05 in FY13) is clearly a positive, albeit partially the result of
advantageous funding costs, and CPB continues to have borrowing room. Still, we
believe Bolthouse’s higher top line growth (MSD organic vs. LSD for CPB) is
slightly outweighed by the business’s materially lower returns (13% normalized
EBIT margin vs. mid-15’s for CPB, mid-20’s for CPB soup), as Campbell continues
to hedge out its high-return, core North America soup business. In addition, while
this is a domestic deal that carries minimal integration risk, the retail fresh
vegetables piece (~50% of sales, ~40% of profits) appears to introduce slightly more
variability into the cash flow stream compared to a typical packaged food enterprise,
albeit seemingly less so than a typical ag business.
• CPB Acquires Bolthouse Farms for $1.55B in Cash. Headquarted in Bakersfield,
CA, Bolthouse Farms generated $689M in sales, $92M in EBIT, and roughly
$150M in EBITDA in its most recent FY ended March 31, 2012. The company has
been averaging MSD organic top line growth and has a normalized EBIT margin of
13%. Its two main businesses, Retail Carrots and Super-Premium Beverages,
account for approximately 50% and 30% of net sales and about 40% and 45% of
profits, respectively. Net of an estimated $100M in NPV of tax benefits, the
transaction is estimated to cost 9.5x adjusted EV/EBITDA and to add $0.03-$0.05
in EPS to FY13, net of about $0.06 related to suspended share repurchase
(~$350M). We raise our FY13E EPS to $2.54 from $2.50 and await the company’s
analyst day later this month for more clarity on FY13 guidance.
• Fresh Beverages Business Growing, Highly Fragmented. Together with V8, the
Bolthouse acquisition will bring Campbell’s healthy beverages platform to $1.2B in
sales, representing approximately 10% of the $12B packaged fresh foods category.
With projected annual growth of 6-7%, this category continues to gain share of
consumer food expenditures. CPB management notes that the category is highly
fragmented, leaving significant room for all players to benefit from this growth. Yet,
to us, the margin structure is the question. While we believe innovation is
particularly difficult on the produce side of the store, based on our observations of
the produce names we cover, it appears that Bolthouse Farms (as well as other
healthy beverage players) has enjoyed plenty of success in bringing excitement to
the category that grows the profit pool for all.
• Risk/Reward Just Fair. CPB’s low valuation by absolute (8.2x CY12 EV/EBITDA
vs. 9.5x historical average) and relative (-15% group discount vs. -LSD% average)
standards, dominant (60% share) and highly profitable (30%+ marginal returns)
soup franchise, and solid balance sheet (~2x PF ND/EBITDA) provide a compelling
entry point in the stock if (and only if) the company can stabilize its share of the
competitive simple meals category. Yet, weak volumes and under-investment hinder
visibility. Furthermore, as demonstrated by today’s acquisition, CPB’s apparent
external growth focus in baked snacks and juices rather than soup portends a less
profitable return outlook than historically. We maintain our FVE at $33, based on a
15% peer discount on CY12E EV/EBITDA

Campbell statement here. Bloomberg story here.