Campbell's Pricey Snyder's Deal May Land CEO in the Soup
(Bloomberg Gadfly) -- Campbell Soup Co.'s biggest acquisition hasn't received much fanfare among shareholders, and now the debt market is wincing, too. As if CEO Denise Morrison didn't have enough on her plate, it's looking more likely that she'll need to keep a lookout for unwanted bidders sensing vulnerability, or activists calling for a change at the top.
Campbell just sold $5.3 billion of bonds to fund its takeover of Snyder's-Lance Inc., which owns snack brands including Snyder's of Hanover pretzels, Kettle chips and Pop Secret popcorn. Normally in a debt sale for an investment-grade issuer like Campbell, the bonds would price at a tighter spread to Treasuries than where they were initially marketed to investors, but not in this case, Bloomberg News's Brian Smith pointed out Wednesday. Instead, the bonds weakened after they were sold, another sign that Morrison's message -- that the snacks acquisition is a "remarkable transformation" of Campbell's growth prospects -- is being met with skepticism.
The concerns are valid. Campbell is raising its net borrowings to 4.8 times adjusted Ebitda, making it the most indebted among the major packaged-food companies. The company plans to lower that ratio to 3 by its fiscal year ending July 2022, in part by suspending share buybacks. Boosting revenue and cutting costs is also part of the plan. But while Snyder's-Lance does offer growth in the sort of better-for-you foods that are trending among U.S. consumers, the company also brings along some of its own headaches.
Campbell is valuing Snyder's-Lance at either a rich 19 times trailing 12-month Ebitda or an even richer 44 times -- and at the high end it would be one of the most expensive food mergers in history. The difference in valuations is due to a giant gap between the standardized Ebitda calculation and the adjusted version, which filters out non-cash impairment charges on certain trademarks and costs associated with its efforts to streamline operations.
The adjusted Ebitda also excludes one-time charges related to the move of a Snyder's-Lance production facility from Stockton, California, to some 2,500 miles away in Charlotte, North Carolina. The company is having to build a new workforce and train for new food-handling processes, and it's costing more than expected. Snyder's-Lance CEO Brian Driscoll gave this update in November, a month before he and the rest of the board agreed to sell to Campbell:
This capital project has been more challenging than we expected, resulting in higher costs than planned and service level disruptions ... This is a very, very significant move for the company, unlike our norm, and I am encouraged by the progress of late, but it certainly did have an impact that's lingering into Q4, but we're making very good progress.
The goal was that the move would "dramatically improve" margins at Snyder's-Lance, which are near the low end for the industry. Campbell estimates it can cut about $170 million of costs by fiscal 2022 through the merger, plus deliver a majority of the cost-saving initiatives Snyder's-Lance was already working toward. If it can do that, the deal looks far less expensive down the road than it will on Day One. But "if" is not a word investors like when it comes to M&A. The same goes for needing to make lots of adjustments for Ebitda to look good.
Following a year that already saw CEO shake-ups at General Mills Inc., Kellogg Co. and Mondelez International Inc., Morrison's position looks more delicate. The 64-year-old has been at the helm of Campbell since mid-2011, and over that time the stock has undershot the peer group noticeably.
The dilemma of needing growing brands and yet wanting to avoid paying too much for acquisitions is hardly unique to Campbell. All the traditional packaged-food leaders are facing this predicament, some (General Mills comes to mind) better than others -- and all while activist shareholders keep watch. Morrison could be in the soup next, but does anyone have any better ideas? We may soon find out.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Tara Lachapelle is a Bloomberg Gadfly columnist covering deals, Berkshire Hathaway Inc., media and telecommunications. She previously wrote an M&A column for Bloomberg News.
To contact the editor responsible for this story: Beth Williams at bewilliams@bloomberg.net.
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