Campbell Soup Bracing for Showdown With Activist Third Point


Al Root

Oct 05, 2018

To say Third Point was unimpressed with Campbell’s recent strategic review would be an understatement. On its RefreshCampbells website, Third Point excoriated management as simply endorsing the status quo—which has left Campbell’s with high debt, sluggish stock performance compared to its peers, and weak returns on invested capital.

Campbell Soup stock was up about 0.1% in afternoon trading on Friday, to $37.26 per share.

An apparently justified and thoughtful take from seasoned activist Third Point hasn’t done much for Campbell’s stock. One reason might be the proxy math. Gordon Haskett analyst Don Bilson notes that 42% of voting shares are held by the Campbell’s family, “so there may not be enough votes for Third Point to win.”

“Third Point has stamina though,” Bilson tells Barron’s, recalling past activism over Baxter, Dow DuPont, Sotheby’s , and Dover. “They have been at for years and they stuck with Dover even after it was broken up.”

Another reason the stock hasn’t moved on Third Point’s involvement could be fatigue with strategic reviews in the packaged food space. Wells Fargo Analyst John Baumgartner said the top-line environment has been tough for a while now.

“Packaged Food companies have had to deal with weak volume, input cost disinflation and low pricing power for a while,” Baumgartner said. “As a result there had been a lot of focus on the middle of the income statement and cost synergies from deals.”

But many packaged food companies, to at least some extent, have already copied the so-called 3G zero-based budgeting approach to cutting costs.

“If you look at Campbell’s Soup quality merchandizing metrics it looks like a ski slope, and when you cut category [ad] support you are telling retailers to go invest in their own private label brand,” Baumgartner said. “Private label growth and smaller, emerging brands have been able to take share from the big players.”

Third Point appears to recognize this, and returning soup to growth is the first bullet point in its alternative strategic plan.

The Nov. 29 annual shareholders meeting may be interesting viewing, but what should investor’s do with Campbell’s stock now? Third Point’s activism doesn’t appear to be priced into the stock price at the moment. Campbell’s is trading for about 14 times its recently reduced guidance. That’s a slight discount to its own history and a slight discount to the package food group. It’s also dropped about 8% since Third Point got involved.

In other words, Campbell’s stock is trading like the status quo is a foregone conclusion. Investors may not believe in the $58 per share target floated by Third Point’s Dan Loeb— an outcome that would seem to be dependent on a large buyer willing to pay 13 times Ebitda (earnings before interest, taxes, depreciation, and amortization) for the company, and then slash spending further.

But the implementation of a more balanced approach focused on revenue growth, as well as a completely new and independent board, would certainly change investor sentiment.