Campbell Soup Quenches Thirst With Bolthouse Purchase

By Will Ashworth | July 08, 2012 AAA
Campbell Soup Company (NYSE:CPB) announced July 9 that it was buying California-based Bolthouse Farms for $1.55 billion from Madison Dearborn Partners. The deal continues its move away from a reliance on soup and toward more healthy offerings. The transaction looks like a winner for both parties.

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The Seller
Madison Dearborn, a private equity firm run out of Chicago, acquired Bolthouse in late 2005, in conjunction with then-CEO Andre Radandt, for $1.2 billion. Madison Dearborn contributed $260 million in cash in exchange for 72% of the business. Radandt, son-in-law to the previous CEO William Bolthouse, rolled over $200 million in equity and the remaining $710 million came from new debt.

Private equity firms don't like to hold portfolio investments much longer than five years and its investment in Bolthouse was entering year seven. Some suggest it tried to do an IPO early this year, valuing the company at $2 billion, but nothing happened on that front so it looked for a strategic buyer instead.

According to Bloomberg, Campbell Soup paid 19.6 times earnings before interest and taxes, the average of 150 similar deals over the past decade is 13.5. Most importantly, Madison Dearborn should achieve an annualized return of slightly more than 20% on its investment.

SEE: How To Invest In Private Equity

The Buyer
Campbell Soup's legacy business is stuck in neutral. For the latest nine months ended April 29, its U.S. Simple Meals segment, which includes the soup business, saw a 2% decline in revenue to $2.3 billion. Meanwhile, its U.S. beverage business increased by 2% to $593 million. In the past two fiscal years, its U.S. Simple Meals segment has seen declines of 6% and 4% in 2011 and 2010 respectively.

By purchasing Bolthouse Farms, Campbell Soup is taking action on one its three key strategies, which is to continue to drive growth in the company's healthy beverages and baked snacks businesses. Its healthy beverage platform now consists of V8, V8 Splash and the super-premium Bolthouse juices, adding $1.2 billion in revenue annually. More importantly, Bolthouse's revenues have grown approximately 7% per year since Madison Dearborn took over, making it the fastest-growing part of Campbell Soup's larger business.

The greater the number and variety of product offerings it can deliver to grocery stores, the better. Buyers at Wal-Mart (NYSE:WMT), which accounts for 17% of its overall revenue, will appreciate the fact that it has one less supplier to deal with. With tough competitors like Pepsi's (NYSE:PEP) Naked brand and Coca-Cola's (NYSE:KO) Odwalla juices, the acquisition of Bolthouse gives V8 a very strong stablemate, which should keep its sales moving in a positive direction.

At the end of the day, CEO Denise Morrison sees the acquisition of Bolthouse as a complimentary fit for its existing products. I couldn't agree more. Consumers are looking for tasty, healthy, on-the-go beverages and snacks these days, not canned cream of mushroom soup. Analysts can bark all they want about the company not addressing problems in its soup business, but that's definitely not the future for the company.

SEE: Analyzing An Acquisition Announcement

The Bottom Line
Campbell Soup's stock has performed horribly over the past five years, down about 0.10% compared to 4.78% for its peers in packaged goods. Although its acquisition appears pricey now, it won't in five years, not by a long shot. While not a game changer, the company is certainly a pleasant surprise. Long-time Campbell Soup shareholders should be smiling at the news.

At the time of writing, Will Ashworth did not own shares in any of the companies mentioned in this article.

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