Campbell Soup Co., facing continued pressure on its core soup business in the US, has again used M&A to broaden its range, striking a deal to buy US snacks maker Snyder’s-Lance. Snacks will become a larger component of Campbell’s sales mix but integrating a business that has had its own issues in recent quarters will be a challenge. Dean Best reports.
For the sixth time in five years, Campbell Soup Co. has got out the chequebook in a bid to inject some vitality into its top line.
Campbell’s latest acquisition, a move to buy US snacks maker Snyder’s-Lance, is the largest in the company’s history and can be seen as an acceleration of its efforts to reduce its reliance on soup.
Campbell will see snacks – an attractive part of the market for companies struggling for growth – generate 46% of its sales, with soup, that product central to the company’s history but now a flagging part of the business, representing just a quarter of revenues.
However, the acquisition of Snyder’s-Lance will not come without its risks, with the Cape Cod and Pop Secret owner having endured challenges of its own in recent quarters.
On 18 December, Campbell president and CEO Denise Morrison announced the sixth acquisition of her tenure as “transformational” and one that will “shift Campbell’s centre of gravity toward faster-growing spaces”.
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Morrison said: “It will optimise our core business, enhance our real food credentials and strengthen our position in the macro snacking market. Second, health and well-being means different things to different people. The addition of Snyder’s-Lance to Campbell will increase our ability to provide consumers with a wider variety of better-for-you snacks, including ones that are organic, gluten-free, non-GMO and provide other functional benefits. And third, the acquisition will help us accelerate our efforts to expand into faster-growing distribution channels.”
Snyder’s-Lance is set to follow in the footsteps of US salad dressings-to-beverages firm Bolthouse Farms – which Campbell acquired in 2011 for US$1.55bn – US baby food group Plum Organics, Danish baked snack company Kelsen Group, US salsa-to-houmous maker Garden Fresh Gourmet and US organic soup maker Pacific Foods – the most recent purchase – as assets bought since Morrison took office in 2011 and sought to reshape the business.
All the while, Campbell’s US soup arm has continued to struggle. In November, Campbell posted worse-than-expected group results for the first quarter of its new financial year, a three-month period that ran to 29 October. On the day the numbers were published, Campbell’s shares fell more than 8%, the steepest one-day fall in its stock since 2008.
Higher logistics expenses in the wake of the US hurricane season, as well as a rise in the cost of carrots, weighed on Campbell’s earnings in the quarter.
However, Campbell also reported a 9% drop in its first-quarter US soup sales, compounding the 1% decline in the company’s previous financial year, a 4% slide the year before that, a 3% fall the year before that – and a 1% drop the year before that. The last 12-month period in which Campbell’s US soup sales rose was its 2013 fiscal year.
Buying Snyder’s-Lance will expand Campbell’s stable of snacks, adding brands like Kettle Chips and Archway cookies, as well as Snyder’s of Hanover pretzels and Lance crackers, to a roster that includes Pepperidge Farm in the US and, more internationally, Kelsen and Tim Tams.
“Those who follow Campbell have heard me talk about our plans to shift our centre of gravity by diversifying our portfolio,” Morrison told analysts on 18 December. “Our new snacks portfolio will represent nearly half of Campbell’s annual net sales while soup will become about one quarter of our annual net sales. This is a truly remarkable transformation for Campbell, and I’m confident that it will lead to an improved growth profile.”
Broadly, analysts saw the strategic merit in Campbell swooping for Snyder’s-Lance. “We see the offer as fair, given the attractive growth prospects of the business,” Morningstar analysts Erin Lash and Zain Akbari wrote in a joint note in the wake of the deal being announced. “The strategic merit of the combination is apparent to us, as the deal materially strengthens Campbell’s exposure to the faster-growing on-trend snack food aisle beyond its Pepperidge Farm line-up.”
However, the last year or so has proved tough for Snyder’s-Lance. At first glance, 2016 looked a solid year for the company, with net income up and net revenue rising more than 27%.
That said, the top-line growth Snyder’s-Lance saw in 2016 was largely due to its acquisition that February of fellow US snack maker Diamond Foods. Snyder’s-Lance said its “legacy” net revenue, which excluded the sales from Diamond Foods, inched up only 0.6%.
Snyder’s-Lance published its 2016 financial results in February 2017. Fast-forward two months and the company hit the market with a double whammy: issuing a profit warning for 2017 and announcing the departure of president and CEO Carl Lee Jr. Lee Jr was replaced with food industry veteran – and former Diamond chief executive – Brian Driscoll, who Snyder’s-Lance said would “move aggressively” to improve earnings.
Come August, Driscoll had unveiled a six-point plan to “deliver greater value for shareholders”, including trying to improve its manufacturing productivity, “optimising” products and portfolio and investing in marketing.
Morningstar’s Akbari says a combination of factors had affected Snyder’s-Lance performance and believes the company has made a headway since Driscoll took the helm.
“They’re in the midst of a turnaround process that came from some lack of focus on the SKUs that they had on the shelves,” Akbari tells just-food.
“[There was] really a lack of discipline when it came to the SKUs. They tried to be all things to all people with a lot of that branded portfolio. Microwave popcorn has been challenging. The Diamond integration was a bit of a distraction, too, because they had to deal with bringing that set of assets on board and then selling the culinary nuts business.
“The new management team has done a fair amount of work already – and some good work – to really refocus the company behind its highest earning items. The resources that are freed up there should be helpful to that firm going forward. And I think that the scale and distribution ability Campbell brings is certainly beneficial even beyond that.”
Campbell’s $50-a-share deal for Snyder’s-Lance valued the snack maker at $6.1bn. To help pay for its new asset, Campbell expects to issue $6.2bn in new debt, which the company said would take its “pro-forma leverage” – measured as net debt to adjusted EBITDA – up to 4.8 times. The company wants that to come down to three times by fiscal 2022 and has suspended its share buyback programme.
Anthony DiSilvestro, Campbell’s CFO, told analysts the enterprise value put on Snyder’s-Lance is 19.9 times what Campbell estimates the snack firm’s adjusted EBITDA will be in 2017. “When you factor in the expected cost synergies, the adjusted EBITDA multiple is 12.8 times,” he added.
This summer, Snyder’s-Lance announced it was looking to extract $175m in cost savings from its business. DiSilvestro said Campbell has analysed those plans and revealed it expects to deliver $125m of the savings.
On top of that, Campbell has identified cost synergies from the takeover of a further $170m, which the company expects to book by its 2022 fiscal year.
On the conference call to discuss the transaction, Campbell’s management was pushed on how confident the company feels about meeting its targets on savings.
“This is a really big synergy number, more so than what we’ve seen typically. And then, given the very extensive nature of Snyder’s-Lance’s changes, their cost optimisation and portfolio, I’m concerned that this is a lot of wood for you guys to chop and that there’s a lot of risks here in actually achieving these synergies,” Citigroup analyst David Driscoll suggested on the call.
DiSilvestro said Campbell was “very confident” it would see the savings, with Morrison adding: “Over the past couple of years, we have been on a very aggressive cost reduction programme for Campbell’s and have gone through many of the same kinds of things that Brian and his team have outlined in their transformation plan. And we over-delivered those savings a year earlier. So we know how to do this. We recognise that it’s complex, but we have had experience and success in doing it in our own company.”
While Wall Street recognises the potential benefits of adding a business squarely focused on snacks to the Campbell portfolio (and one in faster-growing segments like non-GMO and organic), the challenges of integrating Snyder’s-Lance into the company and achieving those savings have furrowed brows among some analysts.
Campbell has had issues in recent quarters with parts of the Bolthouse Farms business it acquired in 2011 – at that time its largest deal – prompting, in the wake of the Snyder’s-Lance announcement, Sanford Bernstein analyst Alexia Howard to remark: “As Campbell is still working to return its newly acquired C-Fresh segment to profitability, it remains to be seen how successful it will be at managing this deal.”
The move for Snyder’s-Lance was announced on the same day Hershey – another US food major battling muted sales growth – said it had struck a deal to buy another Stateside salty snacks business in the shape of Amplify Snack Brands.
Barclays analyst Andrew Lazar, who covers Hershey and Campbell, reflected: “Net net, we understand the strategic rationale for both proposed transactions and see the respective portfolio fits, but view the multiples and execution risk on the higher side of the spectrum. In Campbell’s case specifically, integration risk aside, given the needle-moving scale of this deal, we ultimately do see a better company being built.”
Morrison has been among the most vocal US food CEOs in acknowledging the shifts in eating habits in the country. She has put her money where her mouth is. Will it pay off?