Monday, July 9, 2012

Campbell Soup To Buy Bolthouse Farms, Impact Net Payout Yield

Before the open today, Campbell Soup (CPB) announced a $1.55B deal to purchase Bolthouse Farms. The deal gives Campbell access to the rapidly growing market for packaged foods. The deal is expected to be accretive by $.06 in 2013 with the use of cash and/or debt to finance the purchase price.

Founded in 1915, Bolthouse is a vertically integrated food and beverage company focused on developing, manufacturing and marketing proprietary, high value-added natural, healthy products. The company has leading market positions in fresh carrots and super-premium beverages in the U.S., along with a growing presence in refrigerated salad dressings.

While an intriguing deal, it does bring up an interesting dilemma for our Net Payout Yields (NPY) model that owns Campbell Soup. The company expects to suspend the strategic share repurchase plan in order to use the cash to pay for this deal. Campbell was recently yielding around 11% with only 3.5% coming from dividends.

The NPY concept relies heavily on companies buying shares of it's own stock in order to signal that management views the companies stock has undervalued. When a company instead buys another company it signals that other assets are more attractive.

In the current market though, the argument could be made that both are significantly cheap especially when the deal is this accretive to start.

While not incorporated into our models, the theory can be extended to the complete reduction of assets via repayment of debt in addition to the return of capital via either share repurchases or dividends. Basically the theory suggests that a large corporation provides for better returns by reducing size and focusing on being more efficient. In that essence, Campbell Soup clearly is breaking the guideline and suggests selling the stock. Something though tells me that a company that can snap up accretive deals by using cash flow has a good chance of creating shareholder value as well.

Another dilemma is whether to hold onto the stock for now or quickly sell it. The NPY will remain very strong for a few quarters until old repurchases role off with more recent quarters that fail to buy shares.

Anybody investing under the more technical concept in a manner similar to the Dogs Of The Dow theory would naturally hold onto the stock until the yearly rebalancing. In a more flexible model, Campbell Soup can be sold immediately knowing the yield support won't exist going forward.

For now, Stone Fox Capital is holding onto the stock and evaluating options.

Details from the PR:

  • For its fiscal year ended March 31, 2012, Bolthouse had sales of $689 million and adjusted EBIT of $92 million.
  • Campbell will fund the acquisition of Bolthouse through a combination of short- and long-term borrowings. 
  • The closing of the transaction is subject to regulatory approvals and customary closing conditions and is expected to occur in late summer 2012. 
  • Including the impact of purchase accounting and suspension of the strategic share repurchase plan, Campbell expects that this acquisition will add approximately $0.05 to $0.07 cents per share to its adjusted net earnings in fiscal year 2013, before transaction costs.

Disclosure: Long CPB. Please review the disclaimer page for more details. 




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