Rao’s to increase Campbell Soup’s market share in the upscale sector
During a conference call with financial analysts on August 7, Mr. Clouse stated, “The Rao’s brand delivers a true restaurant quality experience across all of the categories in which it competes: premium sauces, frozen, dry pasta, and soup.” Specifically, it is the undisputed market leader in the highly distinctive Italian sauce category, which is not currently occupied by Campbell. Rao’s growth to date has been driven by the Sovos team in an impressive way, following a playbook that advances distribution gains, brand recognition, and ultimately household penetration. Our strategy is to capitalize on that amazing momentum, uphold their high standards, and keep the exceptional team members while utilizing Campbell’s resources and talents to drive even more greater development using Rao’s sauces.
He pointed out that in the sauce division, Prego and Rao’s “do not interact or compete.”
Mr. Clouse stated, “It’s a different consumer, different occasion.” Furthermore, we are extremely confident that Prego will continue to play a major role in the mainstream segment’s growth. And to match that, we’ve now grown to include a new location, a new consumer base, and a new opportunity. And considering that we have discussed the $1 billion route forward, I believe it has always been a part of our strategy for our sauces business. Nevertheless, the truth is that our business with Prego will never be able to compete in that market. And that’s why this complements each other so well in nature and the reason we regard it as only an acceleration of our established plan rather than a detour or diversion.
“Premium authentic Italian frozen meals brand,” according to him, Michael Angelo’s offers a variety of frozen dinners, including single-serve and family-size portions, all with distinctive flavors that are perfectly linked with at-home dining trends. Pizza and frozen dinners are new product categories for Campbell’s; but, Mr. Clouse stated, “the frozen route to market is not,” citing the company’s line of frozen layer cakes and pastries under the Pepperidge Farm brand.
“With the help of our current Pepperidge Farm frozen portfolio, we’ll be able to build scale and create synergy across both businesses,” he stated.
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The management of Campbell Soup anticipates realizing substantial synergies from the completion of the Sovos Brands transaction, building on the prior integrations of Snyder’s-Lance and Pacific Foods. The deal is pending stockholder approval and customary closing conditions, including regulatory approvals.
“Over the next two years, we expect to achieve run-rate cost synergies of approximately $50 million annually,” Mr. Clouse stated. One third of these synergies will come from our supply chain through increased scale in sourcing and procurement, efficiency gains, and cost savings in our operations network, and about two thirds will come from targeted selling, general, and administrative expense reductions through harmonizing the combined corporate organizations.
Supply chain synergies can be created through partnerships in manufacturing and contract manufacturing, warehousing, logistics, and the procurement of vegetables, meat, glass jars, and other ingredients and packaging, according to Campbell Soup Co. CFO Carrie L. Anderson.
“We expect to incur one-time integration costs and synergy costs of approximately $90 million over the first two years, roughly split 70% related to operating expenditures and 30% related to capital expenditures,” Ms. Anderson stated. Furthermore, we will record additional noncash intangible amortization expense in the region of $15 million to $20 million linked to purchase accounting as a result of this transaction. After averaging for the one-time charges, we anticipate that the deal will be accretive to Campbell’s adjusted EPS by the second year, even with this noncash amortization.
Apart from Rao’s and Michael Angelo’s, Sovos Brands runs the Australian-style yogurt company noosa. Mr. Clouse said, “yogurt is not a place where we see playing long term,” while praising the company and its management.
“We intend to maintain that business’s focus on its operations and allocate dedicated resources there,” he stated. “We’re not supposing any significant organizational synergies there. We want to support that business and allow it to carry on as it has been. After that, we’ll assess what and when the best course of action is. However, I believe that what we’re getting is a fantastic asset with many potential future value-creating uses.
The investment community showed no discernible reaction upon hearing about the deal. On August 7, the New York Stock Exchange saw a 1.8% decrease in Campbell Soup Co. share prices to $44.34, from the previous close of $45.15.