By Jeff Bailey
All this handwringing about the IPO market - Did Facebook (FB) ruin it? Can Kayak revive it? - ignores the role private equity investing plays in recapitalizing companies and allowing owners to cash out, and this week's deal by Campbell Soup (CPB) to buy a fresh-carrots-and-beverages company is a shot in the arm for LBO shops, and thus capital markets in general.
Since the financial crisis hit some four years ago, private equity activity - both purchases and sales of companies - has slowed, as banks moved to reduce lending exposure and other funders grew more cautious, too.
But a few Bolthouse Farms deals - the firm cashing out is Madison Dearborn Partners, based in Chicago - could encourage private equity firms and their bankers to get busy. That, by the way, would likely help the IPO market, another avenue private equity firms use to cash out of investments.
Fender Musical Instruments, for example, is among the firms now lining up for an IPO, which would allow its private equity owners to partially exit.
Campbell agreed to pay $1.55 billion for Bolthouse Farms, a Bakersfield, Calif., farming and foods concern with sales of just $689 million in the fiscal year ended March 31, and "adjusted EBIT" for that period of $92 million. The price was steep, at nearly 17 times that EBIT number, and Campbell's new-ish CEO, Denise Morrison, who inherited a sluggish company that sells too much watery soup, was quick to talk up the deal's positive impact on EPS - 5 to 7 cents in fiscal 2013, before transaction costs.
True, Campbell's distribution muscle may push more Bolthouse goods into grocery stores, lifting the value of the acquisition. But it will take a few successful deals to turn Campbell into a well-performing company again. Without its dividend yield of about 3.5%, Campbell would really be pressed to attract attention.
Campbell has levered up in recent years to fund stock buybacks and the rising dividend.
Raiding the equity cupboard has given Campbell a cartoonish return on equity, the sort of debt-fueled ratio the private equity boys are so fond of. Return on invested capital tells a different story.
But growth has been weak, a problem faced also by other big food companies like Kraft (KFT) and General Mills (GIS).
Campbell's 2012 forecast calls for, at best, 2% sales growth and a decline in EBIT and EPS. Morrison is in this for a long-term turnaround.
She needs growth, and that led to a nice gain for some private equity investors. That's the sort of thing that could help get the financial markets unstuck - IPOs, included.