As in the case of Kraft spinning out its snack brands under Mondelēz before merging with Heinz, Kellogg executives say they hope breaking off its North American cereal and plant-based foods brands from its snacking business will allow the latter to become a higher-growth company than today’s Kellogg Company.
Under the proposed restructuring, Kellogg will create a standalone snacking business that will represent the bulk of Kellogg’s current company with high profile brands, including Cheez-It, Pop-Tarts, Pringles and others, bringing in an estimated $11.4bn in net sales last year. Less than a quarter of those sales came from cereal sold internationally and noodles in Africa, which will be folded into the business alongside snacks.
Once the new “Global Snacking Co.,” which will be renamed later along with the other two businesses, is a standalone operation, it will be better able to compete and respond to the broader snacking segment – likely allowing it to fetch a higher multiple that is more in line with Mondelēz, Utz and PepsiCo, noted UBS analyst Cody Ross.
He added the same should be true for the newly formed North American Cereal Co., which with iconic brands such as Frosted Flakes, Froot Loops and Special K in the US, Canada and Caribbean brought in an estimated $2.4bn in net sales last year.
According to Kellogg, the top priority for this business will be rebuilding inventory, which took a hit last year after a prolonged strike ate into its reserves and hindered its ability to deliver on elevated demand as many consumers continued to eat at home.
Longer term goals include “enhancing its portfolio, operating capabilities and productivity” so that it can generate stable net sales over time with improved margins, higher cash flow and an increased return on invested capital, according to Kellogg.
The third business, temporarily called Plant Co., will spin off the company’s well known MorningStar Farms brand, which has grown steadily since its acquisition 20 years ago. With estimated 2021 net sales of $340m and an estimated EBITDA of approximately $50m, the fate of this company is less certain, with Kellogg noting it is also exploring “other strategic alternatives, including a possible sale.”
Each of the businesses “have significant standalone potential and enhanced focus will enable them to better direct their resources toward their distinct strategic priorities,” said CEO Steve Cahillane, who will maintain leadership of the newly formed Global Snacking Co.
Short-term excitement, long-term uncertainty
News of the split, which will be done as tax-free spin-offs following customary conditions, including review and approval by the Kellogg’s Board of Directors and relevant oversight bodies, was well received by investors and analysts, although at least one cautioned a wait-and-see approach may be wise.
Tuesday morning, following the announcement, Kellogg’s shares popped up more than 8% during pre-market hours, after gaining about 4.8% this year as of Friday.
How long the gains sustain has yet to be seen as inflation continues to rise and CPG companies’ ability to pass added costs on to consumers is becoming more difficult after multiple earlier price hikes in food, at the gas pump and elsewhere are starting to give shoppers pause.