Wednesday, June 5, 2024

Look, Calcbench enjoys good food just as much as the next person, and we often buy Rao’s pasta saunce at the supermarket — but holy cow, does Campbell Soup Co. have that much faith in the brand? 

We ask because Campbell ($CPB) just filed its latest report, for its fiscal quarter ending April 30. The filing included the details of how Campbell accounted for its $2.9 billion acquisition of Sovos Brands, previously owner of Rao’s Homemade pasta sauce and various smaller food brands. The deal closed on March 12.

Calcbench users can find purchase price allocation details using our Disclosures and Footnotes database; just find the company in question and then select the Business Combinations and Acquisitions footnote from the pull-down menu on the left-hand side of your screen. We did that for Campbell, and found the following purchase price allocation for the Sovos deal:

OK, let’s do some math. Campbell acquired $2.37 billion in Sovos assets, and also $585 million in liabilities. Net those numbers out, and Campbell acquired $1.79 billion in net assets — which is almost exactly equal to the $1.78 billion in “other intangible assets” listed above. 

So, really, Campbell paid $2.9 billion to acquire $1.78 billion in tangible assets and another $1.11 billion in goodwill. The amount of physical goods (cash, inventories, plant assets) is only $472 million, easily eclipsed by the $585 million in Sovos liabilities coming along with the deal. 

That’s not so unusual unto itself; Calcbench has written about purchase price allocation many times before, and we’ve often seen deals where the vast majority of the price goes to goodwill and intangibles — that is, stuff that doesn’t physically exist. 

What is unusual is that elsewhere in the footnotes of its latest report, Campbell also provided a breakdown of its goodwill and intangible assets. That includes a listing of the intangible assets by brand, which brings us back to Rao’s. See below.

Rao’s accounts for $1.47 billion of the $1.78 billion in intangible assets that Campbell just acquired from Sovos, or 82 percent of all intangible assets acquired from the deal. Or we can do the math a bit differently: $1.11 billion in goodwill pulse $1.47 billion in Rao’s intangibles equals $2.58 billion, which is 86 percent of the total $2.9 billion purchase price.

In other words, the vast majority of this acquisition rests upon the continued success of the Rao’s brand. That’s not necessarily a bad thing; Rao’s does seem to be a popular brand. (We use it for Calcbench pizza days.) But should Rao’s ever suffer a dive in popularity sometime in the future, that could lead to a write-down of both the trademark value and the goodwill, which would be a nasty surprise to earnings. 

Just food for thought, made possible by Calcbench.

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