Kraft Heinz Might Be Craving Some Soup

It's a busy merger Monday this week, and host Chris Hill and Motley Fool contributors Jason Moser and Taylor Muckerman are here to explain the details in this episode of Market Foolery.

Campbell Soup (CPB -0.37%) is reportedly scoping the market for a buyer. But while some prospects make more sense than others, no one really needs the beleaguered soup maker at this point. Harley-Davidson (HOG -15.74%) is down a bit after international tariffs hit the company's pricing hard, but long-term investors shouldn't be too worried about this bump in the road. AT&T's (T -1.37%) roughly $1.6 billion acquisition of AppNexus is a smidge smaller than its recent Time Warner buy, but the online advertising company could have a ton to offer now that AT&T has all this new content to distribute. Tune in to find out more.

A full transcript follows the video.

This video was recorded on June 25, 2018.

Chris Hill: It's Monday, June 25th. This is Market Foolery. Welcome! Thanks for checking us out. I'm Chris Hill. Joining me in studio, it's Jason Moser and Taylor Muckerman. Happy Monday, gents!

Jason Moser: Hey, hey!

Taylor Muckerman: You as well!

Hill: We have some merger Monday stuff happening!

Moser: Why not? It's Monday.

Hill: We have some legit merger stuff happening, and we have some rumored stuff. We're going to get to the rumored stuff. Any time you start looking at, "What are stocks doing today?" And you see shares of Campbell Soup up 10% --

Muckerman: My goodness.

Moser: Mm-mmm!

Hill: -- that bears further investigation. As a reminder, it was back in May that Campbell Soup said that it was undergoing a strategic review. And, yes, of course, any time you hear, "We're undertaking a strategic review," one of the questions on the table is, "Should we be putting ourselves up for sale?" That's when CEO Denise Morrison said, "Check, please," and she left. Now, we're getting reports that Kraft Heinz (KHC -0.52%) might be looking to buy Campbell Soup, and shares are up 10%.

Moser: I feel like that's language I need to incorporate into my household. We're teaching our kids, we're running this business of our house. The money comes in and it goes out. Every once in a while, I just want to make them wonder, like "Kids, listen, we're under a strategic review right now."

Hill: Or, if you really want to make your kid wonder, say, "You're under a strategic review."

Moser: [laughs] "Everything is on the table."

Hill: Just to set the context -- right now, Campbell Soup is about a $13 billion company. Kraft Heinz is about a $78 billion company. Should Kraft Heinz be looking to buy Campbell Soup? $13 billion seems like a really big check!

Moser: Yeah, it's not chump change. I think the writing was more or less on the wall for Campbell when Denise Morrison stepped down from the CEO role a month ago. She didn't really have a good track record. I'm not going to pin that all on her.

Hill: No, we've talked about how this industry is now the industry to avoid.

Moser: It is. There are a lot of legacy brands out there that we're seeing -- and when I say, "legacy brands," I'm talking about those brands that defined our childhood growing up. Everybody's pantry had Campbell Soup and all of the other stuff that they sell -- what, Pepperidge Farm cookies, and all sorts of stuff. We're undergoing a serious seat change in what folks are putting in their kitchens, how people are eating, how they're viewing eating. We're seeing a lot of these legacy brands facing a point of reckoning here.

With Heinz, Kraft Heinz is a big company right now. If you look at the one advantage in this space, if you're one of those legacy brand companies, it's scale, it's size. Get to be as big as you can, because then you can wring out some of those costs, become as efficient as you can. It at least gives you a few more choices. For Kraft Heinz, it's a $77 billion company, they're bringing in around $26 billion in sales annually. The Campbell acquisition, if that's something they're interested in, could add $8 billion or so to that top line and allow them to wring out some of those costs.

We've seen General Mills lobbed in this discussion as well as a potential party interested in Campbell. I'd say General Mills probably needs Campbell more than Kraft Heinz does. I don't think either one of them needs Campbell, though, really. That's what puts Campbell in such a nasty spot. Nobody really needs them.

Muckerman: [laughs] That's a tough spot, indeed.

Hill: That's some hard medicine. I get the general interest from General Mills, but that's a much smaller company. That's about a $27 billion company. So, the fact that they would attempt to take on Campbell Soup makes less sense to me. They also have soup brands within that. They have Progresso, they have Annie's. You look at Kraft Heinz, for all of the stuff they have going on -- they have Heinz soup in the U.K.

As you said, Jason, they have the scale. Campbell Soup is probably the best-known brand. They don't need it. I think they could make it work. I just wonder about the price tag, because I think there's a point where, if you're a Kraft Heinz shareholder, at which you say, "Yes, we would like Campbell Soup, it would be additive, at a certain price." If they go out and start paying a premium on top of what we're seeing now, then I think you have to question it.

Moser: Yeah, and if you look at Campbell today, the multiple it's trading at is a bit inflated because they had to write off a bunch of goodwill here recently. It's actually not as expensive a stock as you might think at first glance.

I think maybe a decent comparison here could be Mattel. We've talked a lot about Mattel and Hasbro. Mattel isn't a company that I think you really need to go chasing after. It's more like, "Yeah, we'll do you a favor. We'll put you out of your misery if you want to become part of our family. Or you can keep on going at it yourself. But we don't really need you."

I think that most of these parties taking a look at Campbell are feeling the same way. They're like, "Yeah, we'll bring you into our family, but we're going to dictate the price." Again, that's not a good thing for Campbell, obviously, but it's not been the greatest five years for Campbell, so I don't know that they have a whole heck of a lot of choice out there at this point.

Hill: Let's move on to Harley-Davidson, shares down about 5% today. Harley-Davidson's really getting caught up in this trade war. There are newly raised E.U. tariffs that would add a little bit more than $2,000 to the cost of each motorcycle exported to the E.U. from the United States. Harley-Davidson says they're not going to raise prices, but what they are planning on doing is moving production of motorcycles intended for E.U. purchase to their international facilities. This is a little surprising, Taylor, when you consider that this is as iconic a made-in-America brand as there is right now.

Muckerman: Yeah. When you look at this, it's kind of interesting, you saw a bunch of jobs coming back to the United States, and then the trade war starting heating up. I think this is the first time I've seen a company announcing jobs moving back offshore -- especially, like you said, an American icon like this.

They do have some factories internationally, but this is going to add to that. They haven't specified which factory they're going to move this production to, but they have some in Thailand, Australia, India and Brazil. Any of those, I think, are up for grabs.

You mentioned tariffs that are being instituted here. It was already at 6%. Now it's going to be 31% per motorcycle. The average there will be $2,200, as you mentioned. That's a pretty big ding on an item that's only going to cost you between, depending on which one you get, $15,000 to maybe $40,000 if you go super luxury. But that's a pretty big number for an item like that.

Hill: It also comes at a time when -- Jason, you mentioned Campbell Soup struggling over the last five years -- Harley-Davidson has struggled for the last, maybe not five years, but certainly the last two to three years. One of the glimmers of hope for Harley-Davidson was sales outside the United States were on the rise, and starting to somewhat offset the declining ridership here in the U.S.

Muckerman: Yeah, you mentioned that, and you have 12% increase in international sales in their latest quarter. A slight decline of 0.2% in the U.S. When you talk about the E.U., that's their biggest non-U.S. market at about 15% of their sales. And they've been growing their market share, as well. It's certainly an area that they're concentrating on, and it makes sense to me for them to make this move. They say it'll take about nine to 18 months to establish the increased production outside of the U.S. When you talk about that, you're going to lose some jobs in either Pennsylvania, Missouri or Wisconsin, where they have their U.S. facilities.

Moser: Yeah, it's really interesting to watch this play out. On the one hand, we talk about these tariffs, we talk about protectionist measures, and that ultimately, they just raise the cost of doing business. That, generally speaking, isn't really good for anyone. On the flip side, you see the proponents of pushing back a little bit on these tariffs as maybe, the current Administration's angling for a better deal, a fairer deal, at least that's what they espouse. That makes sense, to a degree.

You see these daily machinations that make you wonder, is there anything really to it, versus taking the longer view and thinking, at the end of the day, Harley-Davidson is still going to be Harley-Davidson. If the cost of doing business is seen as not helpful for this really grand American company -- I think we all think Harley-Davidson is one of those real American names -- future administrations may turn that policy around again to try to get more companies like Harley back in their favor.

Again, we talk a lot about taking the long view, and I think that days like these, or headlines like these, it's easy to get lost in the moment there and think, "This is never going to get better," when oftentimes it really does. Harley-Davidson is still a good business. It's still a good brand. This is not really their fault.

Muckerman: No, not at all.

Moser: It's just one of those things that's happening. I would urge investors who either own Harley-Davidson or are thinking about buying Harley-Davidson, look at it beyond this one little moment in time and try to think about it from a longer-term perspective, five, ten years down the road -- is this business still around? I think it is. I think they probably do take advantage of declining ridership in the U.S. by spreading that footprint globally, and maybe you can still see a light at the end of the tunnel.

Muckerman: And they're working on e-bikes. They should have one out in the next year are two. They're keeping up with technology. They're refurbishing some of their lines over the next year or so. Definitely a business to continue to keep an eye on. Just remember Wilbur Ross shaking the Campbell Soup can on CNBC to defend these steel tariffs in China.

Hill: AT&T is buying AppNexus, which is an online ad exchange company. AT&T is paying somewhere in the neighborhood of $1.6 billion, certainly a lot lower than the $85 billion [laughs] that they paid out for Time Warner. Seems like a good purchase here. If AppNexus is any good at all at serving up ads, and AT&T has more content coming their way, then yeah, this seems like this is going to pay for itself in pretty short order.

Moser: I would imagine. We shouldn't be surprised about the deal. It was actually right there in the 10-K back in February, where they wrote in the section of expected growth areas, and I quote, one of these very bullet points, "Creating a new platform for targeted advertising using data, content and talent to build an automated advertising platform that can transform premium video and TV advertising." It seems like in the 10-K, they were already assuming the Time Warner deal was going to go through. I think most of us probably did.

But this really does, I think, complement the business that AT&T has become. They have the pipes, they have the content, now they want to build in the advertising platform to take advantage of all of that. In a Facebook (META -10.56%) and Alphabet world, I think it makes a lot of sense. It's chump change, when you think about it. I know we lob around billions in the form of dollar figures as if they're nothing, but they have plenty of cash on the balance sheet to knock this thing right out. I don't think, at this point, there's any kind of antitrust consideration whatsoever. So, assuming that the people at AT&T know what they're doing, then this should be something that rolls nicely into the business.

Muckerman: You mentioned video and TV advertising, that's where Twitter has been seeing a lot of growth. Certainly makes a lot of sense for a company with much more content than even Twitter has generated. Definitely, ad tech is all the rage these days.

Hill: The reason I hesitated on the price tag that AT&T is paying for AppNexus is, everything I read this morning essentially referred to it as, "This is what has been reported." I saw one line that said, "AT&T is not disclosing the price."

Moser: "The terms of the deal have not been disclosed."

Hill: Yeah, which just left me scratching my head, like, wait a minute. Not what are you trying to hide, but, part of me is like, well, wait, what are you trying to do? Who cares? You just paid out $85 billion for Time Warner! What does it matter if it's $1.6 billion or $1.7 billion?

Moser: That's a good point, I guess, but everybody likes to play their cards a little bit close to their vest sometimes, right?

Hill: Shouldn't you be doing that on the $85 billion deal?

Moser: Well, I mean, I think that's probably more of an obvious price tag.

Muckerman: They have a fiduciary duty!

Moser: We probably all have some questions as far as AppNexus and the potential of this business and the figures. The more that we know about the numbers behind the deal, the more we can speculate on multiples and how much money this company is really worth and what the potential impacts are for AT&T. So, I do get it. Sometimes they just want to not get in the middle of that, they feel like maybe it's protecting their IP or their competitive position at least somewhat. But, I mean, to your point, it is chump change compared to what they just did. It seems like an afterthought.

Hill: By the way, $1.6 billion, just a reminder, that's what Google paid for YouTube.

Muckerman: We have a winner!

Hill: How'd that work out?

Moser: It's a really good point that you make there. When you look at the direction that content is going, YouTube has turned out to be such a phenomenal platform for so many different reasons. I was taken back by asking my kids about this a couple of years ago, even -- if I had to take one of these away from you, Netflix or YouTube, what's the one that you need to keep? And they're like, "Oh, YouTube." That was kind of surprising, but I do get it. YouTube is wonderful for a lot of reasons. I threw a tile backsplash on our shower this weekend at home, and I got some ideas from YouTube. You know I like to dabble in watercolor painting, I learn a lot from YouTube.

Facebook is trying to do the same thing. It's not that content that we know, that we see on TV, necessarily. It's all of this ad hoc content that, everybody's finding what they want, when they want it. That's why YouTube has done such a great job for so long. Man, one of the shrewdest acquisitions ever, next to Facebook's Instagram. I mean, those two together, wow.

Muckerman: You have hours of content going up every second. User-generated.

Moser: Yeah, and Instagram is getting into that same game. Facebook is utilizing that Instagram platform to really grow out that video offering. I think AT&T is doing everything they can to try to at least keep in the same ballpark. I mean, I don't think they hold a candle, really, to Alphabet or Facebook, but they're trying to at least get their share.

Hill: Thanks for being here, guys!

Muckerman: Appreciate it.

Moser: Thank you!

Hill: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. That's going to do it for this edition of Market Foolery. The show is mixed once again by Austin Morgan, filling in for Dan Boyd, who maybe has jet lag from his trip.

Moser: [laughs] Or something else.

Hill: We're not sure. We're going to investigate. I'm Chris Hill. Thanks for listening! We'll see you tomorrow!