Campbell Soup: Sovos Brings Rich Sales Growth, but Unlikely to Stymie Macro Angst; Shares a Bargain

As concerns surrounding the consumer spending backdrop reverberate throughout the consumer packaged goods industry, wide-moat Campbell Soup CPB opted to buoy its prospects by bringing Sovos Brands (around 10% of total sales, the owner of Italian sauce brand Rao’s Homemade) into the fold. The $2.7 billion price tag ($23 per share, a 28% premium to Aug. 4′s closing price) strikes us as a touch rich, corresponding to 20 times adjusted EBITDA and nearly 15 times including targeted synergies of about $50 million (about a mid-single-digit percentage of Sovos’ cost of goods sold and operating expenses).

However, we aren’t blind to the strategic merits of the combination, as the deal materially strengthens Campbell’s exposure to the faster-growing and more premium enclaves of the Italian sauces aisle, as Sovos’ sales are up 28% on an organic basis since 2019. Further, we posit the tie-up should engender distribution gains, given Campbell’s entrenched position with leading retailers, while also affording stepped-up brand investments (behind both consumer-valued innovation and marketing support), given Campbell’s deeper pockets. Still, the transaction stands to dilute Campbell’s operating margins in the near term, given the mid-single-digit marks the target generates versus Campbell’s mid- to high-teens levels.

We don’t think this transaction signals that management is chasing growth, though. In this context, we see the additions of Rao’s and Michael Angelo’s as complementary to Campbell’s existing meals and beverages category reach, but management wisely doesn’t seem inclined to embark into the hotly competitive yogurt niche. Rather than serve as a distraction, we think Sovos’ high-end yogurt brand Noosa could be on the block before long.

When taken together, we don’t plan a material change to our $61 valuation after digesting the deal, which is slated to close in December. And we continue to view Campbell shares as attractive, trading at nearly 30% discount to our valuation.