Drip
Portfolio Report
Tuesday, January 20, 1998
by Randy Befumo
(RandyB@fool.com)
ALEXANDRIA, VA (Jan. 20, 1998) -- Our third finalist in the 1997-1998 Food Olympics is none other than the Campbell Soup Co. (NYSE: CPB), the $25 billion soup and sauce behemoth hailing from Camden, New Jersey. Much like the other finalists we have looked at to date, Philip Morris (NYSE: MO) and PepsiCo (NYSE: PEP), Campbell Soup presents a unique analytical problem for us to test our valuation skills against. You see, you get more than just Campbell Soup when you buy a share of Campbell Soup -- you also effectively buy a smaller portion of the company's pickle, frozen meal and prepared meat operations, which it is about to spin off to the public.
Campbell Soup, as Jeff astutely mentioned in his original article on the company, is all set to dump its lower-margin businesses in order to focus on its global soup, sauce, biscuit, confectionery and food service businesses. The businesses to be spun-off include Vlasic, Swanson, its Argentine Swift Armour operations, "Open Pit" barbeque sauce, its English Stratford Upon Avon canned food business, its German specialty foods operations and its fresh mushroom operations throughout the United States. Combined, these businesses had generated approximately $1.4 billion in revenues for Campbell Soup in fiscal 1997, or about 18% of total revenues.
Although many of the businesses being spun-off are solid subsidiaries with dominant shares of their respective markets, Campbell Soup is getting rid of them because they are simply not as good as the remaining businesses. Net sales for the remaining business grew 10% in fiscal 1997 and net earnings per share grew 15% over the same period, compared to sales growth of 3.8% and an earnings per share decrease of 6.2% for the company as a whole. Clearly, by keeping its faster growing, higher profit units and spinning the rest off at a decent price to shareholders, the Campbell Soup Co. that remains plus the spin-off could be worth more than the sum of the parts that is represented by shares today. Campbell intends to complete the spin-off by the end of February.
As with any company where a spin-off is about to take place, it is incumbent on investors to separate the financials of what will be two companies and determine the relative value. Unfortunately, this is an imperfect science at best and can be complicated when long-term debt is not distributed equally but is instead granted to one part of the spin-off, as it was with PepsiCo and Tricon Global Restaurants (NYSE: YUM). Investors must also remember that this spin-off should be considered within the context of a number of divestitures that Campbell Soup has completed over the past year, including the sale of its Marie salad dressings, Beeck gourmet salads in Germany and Spring Valley beverages in Australia. Campbell's is clearly getting rid of the businesses that it does not deem as valuable as the subsidiaries that it is keeping, indicating that the newly spun-off divisions should probably not warrant any kind of premium valuation.
Any valuation work is made more complicated by the fact that Campbell's has hardly been a shrinking violet on the acquisition front. Since the spin-off announcement, Campbell's has purchased France's Liebig liquid soup business for $170 million and Australia's Arnotts Ltd. cookie and biscuit business for $300 million. Although potentially a problem when we sit down to do the math, investors should view these acquisitions with some degree of excitement. Since the beginning of the 1990's Campbell Soup has sold more than two dozen businesses that contributed 1% of earnings but purchased roughly 20 businesses that currently contribute 12% of earnings, indicating that the company has been very astute at pruning and acquiring. In fact, the reason the businesses are being spun-off rather than sold is not for lack of buyers, but in order to take advantage of the tax-free status most spin-offs enjoy.
As demonstrated in our look at Kansas City Southern (NYSE: KSU) some months ago, the procedure we use in the Drip Portfolio to value a company in the midst of a spin-off is simple. First, value the company as a whole. Then, figure out the potential value of the company being spun-off. Third, find a reasonable value for the remaining company and compare this to the current value of the whole less the anticipated value of the spin-off. If the projected value for the spin-off is substantially higher than the current value of the whole, less a conservative value for the spin-off, it is reasonable to assume that the possibility of making a decent return exists. We're not interested in short-term gains, of course, but we are interested in putting our money to work for us, rather than throwing it into a company priced well above its fair value and waiting a number of years for that value to catch up with us. Thus, tomorrow we will open with a quick summation of the current enterprise value (or price) of Campbell Soup and then quickly move to determine what the value of the unnamed Vlasic-Swanson subsidiary would seem to be.
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