Kellogg Company (K) Stock: Why It Increased 1.95% Today

By Amit Chowdhry ● Jun 21, 2022
  • The stock price of Kellogg Company (NYSE: K) increased by 1.95% today. This is why.

The stock price of Kellogg Company (NYSE: K) increased by 1.95% today. Investors responded positively to the company announcing that its board of directors approved a plan to separate its North American cereal and plant-based foods businesses, via tax-free spin-offs, resulting in 3 independent public companies, each better positioned to unlock their full standalone potential.  The 3 companies, whose names will be determined later, would be the following:

— “Global Snacking Co.” – With about $11.4 billion in net sales, will be a leading company in global snacking, international cereal and noodles, and North American frozen breakfast, with iconic, world-class brands and strong underlying growth momentum and profitability;

— “North America Cereal Co.”- With about $2.4 billion in net sales, will be a leading cereal company in the U.S., Canada, and the Caribbean, with a portfolio of iconic, world-class brands and compelling opportunities for investment and profit growth; and

— “Plant Co.”- With about $340 million in net sales, will be a leading, profitable, pure-play plant-based foods company, anchored by the MorningStar Farms brand, with a significant opportunity to capitalize on strong long-term category prospects by investing further in North America penetration and future international expansion.

In recent years, Kellogg has transformed its portfolio into one that has expanded geographically and shifted toward growing businesses, particularly in snacking categories.  And to achieve this, it has directed resources and investments toward growth categories and markets around the world made several acquisitions and partnerships in emerging markets and strengthened its snacks business through acquisitions, divestitures, and the freeing up of resources by exiting from direct-store delivery.

The successful execution of these actions has expanded Kellogg’s portfolio, resulting in a scaled global snacking business and a significant emerging market presence, complemented by strong and profitable breakfast and plant-based foods businesses. And the outcome of these strategic actions has been improved growth in recent years, with momentum sustained into 2022.

After several years of transformation and improving results, the company believes it is the right time to separate these businesses so they may pursue their particular strategic priorities.

As independent companies, all 3 businesses will be better positioned to:

— Focus on their distinct strategic priorities, with financial targets that best fit their own markets and opportunities;

— Execute with increased agility and operational flexibility, enabling more focused allocation of capital and resources in a manner consistent with those strategic priorities;

— Realize improved outlooks for profitable growth; and

— Shape distinctive corporate cultures, rooted in Kellogg Company’s strong values, and rewarding career paths for employees of each company.

The 3 companies, discussed under temporary names, will be:

Global Snacking Co.

The planned separations will result in a Global Snacking Co. that is expected to enhance its leadership position in the global snacking, international cereal and noodles, and North America frozen breakfast categories, by focusing investments and capital on building upon its strong growth momentum and profitability.

Kellogg Company’s three international regions – Europe, Latin America, and the Asia Pacific, Middle East, and Africa (“AMEA”) – will remain almost entirely intact within Global Snacking Co.  Steve Cahillane will remain Chairman and Chief Executive Officer of Global Snacking Co.

Overview

— Global Snacking Co. had estimated 2021 net sales of $11.4 billion and estimated EBITDA of approximately $2 billion on an adjusted basis, based on preliminary allocation assumptions.

— Nearly 60% of its net sales come from global snacks, participating in growing categories and led by iconic, world-class brands including Pringles, Cheez-It, Pop-Tarts, Kellogg’s Rice Krispies Treats, Nutri-Grain, and RXBAR, among others.

— Less than a quarter of its net sales come from cereal in international markets, featuring world-class brands such as Kellogg’s, Frosties / Zucaritas, Special K, Tresor / Krave, Coco-Pops, and Crunchy Nut, among others.  By remaining with Global Snacking Co., this international cereal business provides scale, continuity, and growth for the company’s Europe, Latin America, and AMEA Regions.

— About 10% of its net sales come from noodles in Africa, a rapidly expanding business.

— The remainder, less than 10% of its net sales, comes from frozen breakfast and the world-class Eggo brand.

— Geographically, North America will represent just under half of the net sales, emerging markets about 30% of net sales, and developed international markets more than 20% of net sales.

Outlook

— This business is expected to be a higher-growth company than today’s Kellogg Company, featuring a more growth-oriented portfolio and aided by more focused resources and attention to brand building, innovation, and international expansion of world-class brands, and to building scale in emerging markets.

— This business is expected to expand profit margins through operating leverage, revenue growth management, productivity, and increasing emerging-markets scale.

North America Cereal Co.

The company plans to separate North America Cereal Co. as an independent business through a tax-free spin-off.  North America Cereal Co. is a leader in cereal in the U.S., Canada, and the Caribbean, with beloved brands, a heritage of innovation, and more than a century of operational success.  As a standalone company, North America Cereal Co. will have greater strategic focus and operational flexibility and will direct capital and resources toward unlocking growth, regaining category share, and restoring and expanding profit margins. The proposed management team for North America Cereal Co. will be announced at a later date.

Overview

— North America Cereal Co. had estimated 2021 net sales of $2.4 billion and estimated EBITDA of approximately $250 million on an adjusted basis, based on preliminary allocation assumptions.

— The business is focused on ready-to-eat cereal in the U.S., Canada, and the Caribbean.

— North America Cereal Co.’s portfolio is comprised of iconic, world-class brands such as Kellogg’s, Frosted Flakes, Froot Loops, Mini-Wheats, Special K, Raisin Bran, Rice Krispies, Corn Flakes, Kashi, and Bear Naked.

Outlook

— For the near term, North America Cereal Co. will be focused on the restoration of inventory, profit margins, and share position following 2021 supply disruptions.

— Longer-term, it will focus resources and strengthen the business by enhancing its portfolio, operating capabilities, and productivity.

— This business is expected to generate stable net sales over time, with improving profit margins that will drive profit growth, higher cash flow, and increased return on invested capital.

Plant Co.

The company intends to separate Plant Co. as an independent business through a tax-free spin-off, while also exploring other strategic alternatives, including a possible sale. And Anchored by the leading MorningStar Farms brand, Plant Co. will be a profitable, pure-play, plant-based foods company.  This business offers a full portfolio of plant-based offerings across multiple product segments and eating occasions.  Kellogg has grown MorningStar Farms steadily since its acquisition over 20 years ago, and the brand now has the highest share and household penetration in the frozen vegetarian/vegan category. The proposed management team for Plant Co. will be announced at a later date.

Overview

— Plant Co. had estimated 2021 net sales of $340 million and estimated EBITDA of approximately $50 million on an adjusted basis, based on preliminary allocation assumptions.

— The business is currently focused on the U.S., Canada, and the Caribbean.

Outlook

— As an independent business, Plant Co. will have the opportunity to build on its strong base of growth and profitability, focusing its resources and investments on capitalizing on strong category prospects, by building awareness and penetration in North America and expanding internationally in the future.

— The business is expected to accelerate net sales growth over time, from previously disclosed portfolio-segment assumptions.

Headquarters Locations

North America Cereal Co. and Plant Co. will both remain headquartered in Battle Creek, Michigan. And Global Snacking Co. will maintain dual campuses in Battle Creek and Chicago, Illinois, with its corporate headquarters located in Chicago. Plus Kellogg Company’s 3 international regions’ headquarters in Europe, Latin America, and AMEA will remain in their current locations.

Transaction Details, Timing, and Future Updates

The proposed spin-offs are intended to result in tax-free distributions of North America Cereal Co. and Plant Co. shares to Kellogg Company shareowners.  The shareowners would receive shares in the two spin-off entities on a pro-rata basis relative to their Kellogg holdings at the record date for each spin-off.

The company expects the North America Cereal Co. spin-off may precede that of Plant Co., with both currently targeted to be completed by the end of 2023. And the transactions will follow the satisfaction of customary conditions, including reviews and final approval by Kellogg’s Board of Directors, receipt of an Internal Revenue Service ruling and relevant tax opinions with respect to the tax-free nature of the transactions, the effectiveness of appropriate filings with the U.S. Securities and Exchange Commission, and the completion of audited financials of the independent companies.

The capital structures, dividends, governance, and other matters for each business will be announced at a later date.  Management is committed to maintaining an investment-grade credit rating for Global Snacking Co. after the separations.  In addition, the company expects to maintain a strong aggregate dividend and return-on-capital profile across the three businesses.  The independent dividend and capital structure policies for each business are expected to be competitive relative to their relevant peer sets.

The company will start incurring pretax expenses related to executing the transactions and setting up the companies.  To ensure visibility into the ongoing results of the businesses, the Company will disclose these up-front costs and exclude them from its adjusted-basis results in its external reporting.

KEY QUOTE:

“Kellogg has been on a successful journey of transformation to enhance performance and increase long-term shareowner value.  This has included re-shaping our portfolio, and today’s announcement is the next step in that transformation. These businesses all have significant standalone potential, and an enhanced focus will enable them to better direct their resources toward their distinct strategic priorities.  In turn, each business is expected to create more value for all stakeholders, and each is well-positioned to build a new era of innovation and growth.”

— Steve Cahillane, Kellogg Company’s Chairman and Chief Executive Officer

Disclaimer: This content is intended for informational purposes. Before making any investment, you should do your own analysis.