Traders Gorging on Campbell Calls Amid Deal Speculation

Options traders are doubling down on bets that Campbell Soup Co. is the next big takeover candidate.

Bullish calls on the stock are close to the most expensive in history compared with bearish puts, according to data on three-month contracts compiled by Bloomberg. In the morning of Aug. 18, a block of 5,500 calls that pay off if Campbell rallies more than 8 percent in the next month changed hands on the ask price, indicating that a buyer initiated the trade, according to data compiled by Bloomberg. The transaction was nine times more than call volume over the past 20 days.

In a year that’s seen more than $60 billion in food-company deals from Monster Beverage Corp. to Hillshire Brands Co. and Chiquita Brands International Inc., there’s growing speculation that Campbell will become part of that industry’s consolidation. The maker of Goldfish crackers and chicken noodle soup is attractive to buyers for its well-known brands and smaller size compared with competitors, according to Max Breier of BMO Capital Markets Corp.

“The options action speaks to someone looking at this thing as a potential takeout,” Breier, a senior equity derivatives trader at BMO in New York, said in a phone interview. “There’s a burgeoning dynamic of consolidation in the food space. It’s really a story of survival.”

Call Volume

A total of 13,407 calls traded Aug. 18, the most in eight months, as the stock closed up 0.9 percent. Shares of Camden, New Jersey-based Campbell have risen 2.2 percent this year. The stock gained 0.3 percent to $44.22 at 4 p.m. in New York today.

For Campbell, unlike most companies, bullish contracts are more expensive than bearish ones. Calls betting on a 10 percent gain in shares cost 1.97 points more than puts protecting against a 10 percent drop. The spread reached 3.48 July 31, the widest gap on record, data compiled by Bloomberg show.

The purchase of ketchup maker HJ Heinz Co. by Berkshire Hathaway Inc. and 3G Capital, announced in February 2013, ignited speculation that food companies are attractive takeover targets. Warren Buffett, Berkshire’s 83-year-old chairman, told shareholders May 3 that he’d welcome another large deal with 3G Capital, a New York-based buyout firm.

“When you look around for other companies that offer similar products, you come up with Campbell among the rest,” Jack Russo, a St. Louis-based analyst at Edward Jones & Co., said in an Aug. 18 phone interview.

Better Opportunities

Thomas Hushen, a spokesman at Campbell, declined to comment. 3G didn’t respond to an e-mail, and Buffett didn’t respond to a request for comment sent to an assistant.

Shrinking sales at Campbell signal there are better investment opportunities elsewhere, according to Michael Binger of Gradient Investments LLC. Revenue rose 0.4 percent to $1.97 billion in the fiscal third quarter, the company reported May 19, trailing the average analyst estimate.

Campbell also cut its annual forecast that day, saying U.S. shoppers aren’t buying enough soup -- especially the condensed varieties that have long been a staple of American pantries. The company now expects sales to climb about 3 percent, compared with a previous range of 4 to 5 percent growth.

“It hasn’t been performing all that well recently,” Binger, a senior portfolio manager at Gradient Investments in Arden Hills, Minnesota, said in a phone interview. The firm manages $625 million and exited its Campbell holdings this year. “I don’t think the environment has gotten any better.”

More Affordable

While a takeover would need approval from family members who own more than 40 percent of Campbell’s shares, the company is more affordable than 70 percent of its food-manufacturing peers based on its price-earnings ratio, according to data compiled by Bloomberg.

Campbell has a market value of $13.8 billion, compared with an average of $21.7 billion for packaged-food stocks in the Standard & Poor’s 500 Index.

The company being acquired would imply further consolidation in the food industry, which is already on pace to have its busiest year for deals since at least 2001. In July, Tyson Foods Inc. agreed to buy Hillshire for about $7.8 billion, fending off a rival bid from Sao Paulo-based JBS SA to add brands such as Ball Park hot dogs and State Fair corn dogs.

Chiquita, owner of the namesake banana label, rejected an unsolicited $611 million takeover proposal from Cutrale Group and Safra Group Aug. 14. The company will instead continue with its planned purchase of Irish competitor Fyffes Plc. The same day, Coca-Cola Co. agreed to buy a 17 percent stake in Monster Beverage for $2.15 billion, increasing its bet on the burgeoning energy-drink market.

“Looking at some of the M&As in the packaged goods space, they’re relatively attractive from a valuation standpoint,” Walter Todd, who oversees about $1 billion as chief investment officer for Greenwood, South Carolina-based Greenwood Capital Associates LLC, said in an Aug. 18 phone interview. “If tomorrow Berkshire Hathaway bought out Campbell Soup or Kellogg, it wouldn’t surprise me dramatically.”

(An earlier version of this story corrected the percent change in the company’s sales under ‘Better Opportunities’ subhead.)

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