Campbell Seen as Next Course for Buffett After Heinz

Tuesday, 17 Dec 2013 10:29 AM

 

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Campbell Soup Co., the maker of Goldfish crackers and chicken noodle soup, may be next on acquirers’ grocery lists after the $29 billion takeover of H.J. Heinz Co. this year.

Campbell options contracts surged this month amid speculation the $13 billion company could attract takeover interest. After 3G Capital and Berkshire Hathaway Inc. agreed in February to buy ketchup maker Heinz, investors are eyeing Campbell as the next big target in the packaged food industry, said Edward Jones & Co.

Investment firm 3G may be interested because of the benefits of combining Heinz’s and Campbell’s vegetable processing, and Warren Buffett’s Berkshire could help bankroll a deal again, Sanford C. Bernstein & Co. said.

Like Heinz, Campbell has a strong brand, which may appeal to other food makers and financial buyers, said S&P Capital IQ. Even as Campbell faces slowing sales of its iconic soups as consumers turn to fresher foods and competing brands such as Progresso, the company still offers a buyer the biggest share of the soup market at 22 percent.

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While a takeover would need approval from family members owning more than 40 percent of Campbell’s shares, the company also is more affordable than 70 percent of food-manufacturing peers based on its price-earnings ratio, according to data compiled by Bloomberg.

Campbell has “obviously got some brands that are really worthwhile,” Jack Russo, a St. Louis-based analyst at Edward Jones, said in a phone interview. After the acquisition of Heinz, “investors tend to think where there’s one, there could be two or three” deals.

Soup Decline

Carla Burigatto, a spokeswoman for Camden, New Jersey-based Campbell, declined to comment on a potential sale of the company. A representative for 3G declined to comment, and Buffett didn’t respond to a request for comment sent to an assistant.

A month ago, Campbell reported a decline in first-quarter soup sales and said profit for the year ending in July will be less than previously forecast. Amid market-share losses to rivals such as Progresso-maker General Mills Inc., Campbell has been focusing on bolstering its beverage division.

Campbell has made acquisitions since 2011 to catch up with shifting consumer preferences, including the purchases of juice maker Bolthouse Farms and baby food purveyor Plum Organics.

After Berkshire and 3G announced the acquisition of Heinz on Feb. 14, shares of Campbell advanced along with other consumer stocks such as General Mills and J.M. Smucker Co. Campbell rose as much as 6.2 percent that day for the biggest intraday gain since 2008.

Buffett, 3G

One thing that drew Buffett and 3G to Heinz was the opportunity to use the acquisition “as a platform to sort of get bigger around the global food industry,” Bill Johnson, former chief executive officer of the ketchup maker, said during a February conference call.

If 3G is seeking to increase its foothold in packaged foods, Campbell “would definitely be next on the list,” Alexia Howard, a New York-based analyst at Bernstein, said in a phone interview.

“Heinz’s big businesses are largely vegetable-based. Obviously, they’ve got tomato ketchup here in the U.S., and in the U.K., they’ve got a soup business that’s actually very like Campbell’s. There probably would be a lot of benefits on the vegetable procurement front.”

Campbell saw record volume Dec. 6 in a series of bullish options that will pay off if the stock advances more than 5 percent by the end of this week. More than 20,000 contracts of $43 December calls changed hands that day, compared with an average daily volume of about 60, data compiled by Bloomberg show.

‘Classic Example’

Henry Schwartz, president of Trade Alert LLC, a New York-based provider of options-market data and analytics, said it was “a classic example of what takeover speculation looks like in the options market.”

While 3G likely lacks the financial resources to acquire Campbell on its own as it digests the Heinz takeover, Buffett could use his deep pockets to help fund a deal sooner, Howard said.

Berkshire also already owns candy maker See’s Candies, and helped finance the purchase of Wm. Wrigley Jr. Co. by Mars Inc. in 2008. Buffett has praised the business model of turning commodity ingredients into premium-priced products.

In food manufacturing, “it’s easier to buy than it is to build,” said John Kornitzer, founder of Shawnee Mission, Kansas-based Kornitzer Capital Management Inc. His firm owns shares of Campbell.

Dorrance Family

Kornitzer estimated Campbell could command $55 to $60 a share in a takeover, compared with its closing price of $40.97 Monday.

While merging Heinz and Campbell could make sense, 3G may prefer to expand in faster-growing emerging markets, said Thilo Wrede, a New York-based analyst at Jefferies Group LLC. 3G, which is based in New York, is backed by Brazilian billionaire Jorge Paulo Lemann.

Any buyer of Campbell also may need to win over the Dorrance family, Wrede said.

John T. Dorrance, a chemist, invented condensed soup in 1897, and his descendants now own more than 40 percent of the shares, according to regulatory filings. His granddaughter, Mary Alice Dorrance Malone, serves on the board and is the largest holder with 17 percent of the shares.

“We haven’t seen any indications they would be willing sellers,” Wrede said in a phone interview. “That would be the biggest challenge.”

Fragmented Ownership

Even so, the family’s ownership is fragmented and many individuals don’t need to disclose their holdings, making it unclear whether they would vote as a block on a takeover proposal, said Howard of Bernstein.

Absent a sale, Campbell could boost shareholder value by spinning off or selling its baking and snacking business, which includes Pepperidge Farm brand breads and Goldfish crackers, Howard said.

After advancing 17 percent this year, Campbell still trades at 17.5 times profit, cheaper than the median of 22 among global peers with market values higher than $1 billion, data compiled by Bloomberg show.

Campbell’s low valuation would be attractive to suitors expecting a turnaround for the soupmaker, said Tom Graves, a New York-based equity analyst at S&P Capital. While it could appeal to another food manufacturer, Campbell also may lure interest from financial buyers which could help fund a takeover with the cash now earmarked for the company’s dividend, he said.

Even after takeover speculation helped fuel gains, “it is cheap relative to other food stocks,” Graves said. “Some people could be eyeing Campbell as a takeover candidate.”

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