Campbell Soup's New Acquisition Makes Sense But Comes At A Steep Price

Following Campbell Soup Company CPB's announcement of an agreement to buy organic foods company Pacific Foods for $700 million, Credit Suisse said the acquisition makes sense. However, the firm felt the deal has come at a high price and a low margin.

The firm indicated that the deal price represented 3.2 times Pacific Foods' trailing 12-month sales of $218 million.

Like The Organic Food-Leaning

Analyst Robert Moskow said he liked the fact that Campbell has shifted its M&A attention toward an organic-stable category. The analyst thinks the company has significant expertise in the area and can add value rather than packaged fresh category, where it faced so many integration missteps and supply chain problems.

"However, with a price tag that exceeds 20x EBITDA for such a low operating margin business (probably single-digit), the acquisition won't provide much in the way of financial benefits nor much help for the stock," Credit Suisse said.

Credit Suisse noted that Pacific Foods supplies premium-priced soups, which account for 90 percent of its sales. The firm opined that Campbell Soup should be targeting the young customer following of the target company. In traditional channel, Pacific Foods' soup business grew 10 percent and had a 2.7 percent share of the category.

Lowering Price Target

The firm estimates earnings per share accretion of merely 3 cents per share even if synergies worth 7 percent of sales are assumed over time.

As such, Credit Suisse maintained its Underperform rating on the shares of Campbell Soup and lowered its price target from $53 to $50. The firm attributed the downward revision of the price target to assumption of lower multiples across the packaged food space.

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