Campbell Soup Bets the Farm
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I am about to write in a style that is pretty new to me. If you have read any of my articles here on The Motley Fool, you might be surprised, shocked, afraid even. I, having established myself clearly as a Negative Ned, am somewhat optimistic about Campbell Soup's (NYSE: CPB) recent acquisition of Bolthouse Farms.
The $1.55 billion purchase from Madison Dearborn Partners is, on the surface, a little questionable. Why is a canned soup-maker buying a company that derives more than 50% of its revenue from selling carrots? Are they anticipating an up-coming carrot soup explosion? Probably not. Though it is tough to see now where Campbell envisions Bolthouse fitting in to their core business (or peripheral businesses for that matter), it is a genius branding move. Campbell is getting in bed with a 97-year-old, socially responsible, health-conscious farm. I'm surprised Mitt or Barack hasn't snapped this one up yet just to improve their election chances.
It seems to me Campbell is buying a farm with a recognizable brand name, off of which that they can build their other brands. Campbell confirms this, according to the Wall Street Journal, by saying they "hope the deal will create a firm base from which to create a broader portfolio of packaged fresh foods, including soup." It is unclear as to whether or not they will use the Bolthouse Farms name on their other products; and although they have not yet fully detailed their plans, Campbell has stated they plan to run Bolthouse separately from their North American operations. I can't foresee Campbell not taking advantage of the brand equity of the Bolthouse name, but in what capacity they will do this is yet to be seen.
Bolthouse has been on the sale docket for a while now. In March 2012, Madison Dearborn was said to be considering an IPO for as much as $2 billion. A recent study suggests the traditional IPO premium over acquisition is about 25%, making the Bolthouse deal seem like a pretty nice bargain for Campbell. It seems like Madison Dearborn wanted to unload this and Campbell got in cheaply, further solidifying Campbell's position that this is a company they plan to work with over time.
The one area that Campbell can jump right into with this purchase is the $1.6 billion super-premium juice category. Currently dominated by Pepsico's (NYSE: PEP) Naked Juice and Coca-Cola's (NYSE: KO) Odwalla, Bolthouse juices can position Campbell to compete in this market. Currently, Tropicana (the Pepsico segment in which Naked Juice is housed) constitutes about 10% of Pepsico's revenues, and Pepsico's nutrition business (which includes Quaker, Tropicana, and Gatorade) experienced about 9% growth in 2009; unfortunately this is the most detail Pepsi provides for Naked. Coca-Cola is similarly vague, but they do not consider Odwalla to be a core brand within their still beverages category, suggesting minimal impact.
I guess I am back to my usual pessimistic self. Though Campbell's purchase of Bolthouse does seem like a great idea on the outside, I have to question what the real motivation was. The juice business is not growing as fast as the hype would suggest. It's a stretch to think the deal was done purely for branding reasons … I'm sure clarity will come with time.
TheLaowai has no positions in the stocks mentioned above. The Motley Fool owns shares of The Coca-Cola Company and PepsiCo. Motley Fool newsletter services recommend PepsiCo and The Coca-Cola Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.