Campbell Soup Co. agreed to buy Sovos Brands Inc. in a deal valued at $2.7 billion, expanding the soupmaker’s presence in frozen meals and giving it a foothold in the premium pasta sauce market.
The acquisition of Sovos, best known for the Rao’s pasta sauce brand, widens Campbell’s presence in key food categories. Rao’s accounted for 69% of adjusted net sales last year for Sovos, which went public in 2021. The transaction is expected to close by the end of December.
It’s Campbell’s biggest deal since 2017 when it acquired snackmaker Snyder’s Lance for about $6 billion, according to data compiled by Bloomberg. Sovos soared as much as 26% following the news. Campbell Soup shares fell 1.5% at 10:29 a.m. in New York trading.
Adding Sovos “reflects several of the most relevant consumer trends today,” Mark Clouse, chief executive officer of Campbell, said on a call following the deal announcement: “more premium restaurant quality experiences and quick and delicious meal solutions.” Campbell’s premium business in its meals and beverage portfolio will jump above 25% with the new brands, up from about 10% currently, Clouse said.
After stocking up during the pandemic, Americans have pulled back spending on packaged food over the past year. Rising prices have helped companies maintain sales growth, but that formula is showing signs of weakening as shoppers increasingly hunt for bargains.
Campbell will pay $23 a share, according to a statement Monday, representing a premium of about 28% over Sovos’ Aug. 4 closing price. The acquisition is expected to support Campbell’s long-term financial growth plan with annual cost savings of about $50 million over the next two years. The termination fee would be $145 million minus expenses.
Campbell’s long-term rating was downgraded at S&P Global Ratings after the announcement, reflecting an expected “increase in debt leverage and lower free operating cash flow over the next couple of years.” Campbell plans to finance the deal through the issuance of new debt.
S&PGR expects Campbell’s interest expense to “increase meaningfully” with the debt as well as its plans to boost investment in capacity. The higher interest expense will leave “less cash flow for discretionary debt reduction,” the credit-ratings company wrote.
Rapid Growth
The sale punctuates Sovos’ rapid growth over the past two years. The company, which also makes Noosa yogurt, was valued at about $1.3 billion following its trading debut in September 2021.
“Yogurt is not core to our strategy,” Clouse said on the call. But “it’s performing well” and Campbell will continue to run the brand “as we evaluate strategic alternatives,” he said.
What Bloomberg Intelligence Says
Campbell Soup’s plan to acquire Sovo Brands for $2.7 billion (19.8x without synergies) makes sense, mainly due to the Prego-Rao’s overlap, though Noosa is hard to rationalize and may be the first candidate for divestment. The brand has 2% of the yogurt category, generating $216 million in the 52 weeks ended July 16, according to Circana. At a 1.12x price-to-sales (median BI North America packaged-food peer group), it could be sold for $242 million.
- Diana Rosero-Pena, consumer staples team
Sovos is also the parent of the Michael Angelo’s brand of frozen Italian meals, which include lasagna and pasta. While these are new categories for Campbell, the company said it will use its existing Pepperidge Farms frozen portfolio to create synergies.
--With assistance from Matt Townsend and Liana Baker.
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