- Kellogg stock rose on Tuesday after the company announced a proposed corporate split to make the 116-year-old cereal conglomerate nimbler.
- Names and details will come later, but the company has confirmed that the spin-off should be finalized by the end of 2023.
- Kellogg shares closed up nearly 2% for the day, while the S&P rose nearly 2.5%
Kellogg stock rose more than 8% in premarket trading and was up only 2% before pulling back on Tuesday. The excitement of the opening day was sparked by a press release detailing initial plans to split the 116-year-old well-known cereal brand’s company into three separate enterprises. Kellogg’s trades up about 6.5% for the year.
Despite Kellogg’s early morning rise, it’s hard to determine how much of its daily exposure is due to the news. In fact, the broader S&P 500 rose nearly 2.5% in Tuesday’s session. Given that Kellogg stock has lost most of its gains close, it appears that investors approached the proposed split with more caution in the days following.
Still, the news is fresh, and it’s not every day that a corporation undergoes a three-way split. (Especially in the food industry.) So let’s take a look at Kellogg’s delicious surprises and what it means for investors.
What does a Kellogg split look like
So far, in-depth details about Kellogg’s split have been somewhat sparse. The company noted that it will release the official company name, capital structure, governance and similar matters at a later date.
That said, Kellogg’s confirmed that its national and international headquarters will remain unchanged. The company also expects to complete its spin-off by the end of 2023, excluding any glitches in the audit and regulatory approval process.
Assuming that all goes according to plan, the goal is to spin off Kellogg’s US, Canada and Caribbean grain and plant-based businesses into separate ventures. All told, its spin-off will represent about 20% of its 2021 net sales.
Here’s what else we know.
“Global Snacking Company”
Under the current proposal, the bulk of Kellogg’s business (which accounted for $11.4 billion in net revenue in 2021, or about 80% of its business) would operate under a “global snacking company.”
The global snacking company will include Kellogg’s snack brands, the international cereal and noodles segment and North American frozen breakfast. Popular snack and breakfast brands included under this umbrella include Pringles, Cheese-Its and Eggos.
The company estimates that in 2021, global snacks alone accounted for 60% of the firm’s net sales.
“North America Cereal Company.”
The next largest entity will be the “North America Grain Company,” which accounted for about $2.4 billion in sales during 2021. This segment includes the company’s major cereal brands in the US, Canada and the Caribbean.
The North America cereal company intends to focus on the ready-to-eat cereal market with names such as Frosted Flakes, Special K, Raisin Bran and Fruit Loops. Ideally, the spin-off will gain market share in the cereal segment and drive profits and sales growth.
The final spin-off, “Plant Company,” only accounted for $340 million in net sales last year. Still, Kellogg’s is branding the venture as a “leading, profitable, pure-play plant-based food company.”
Will anchor the new company’s product Morningstar Farms Brand for your products. However, unlike the other two spin-offs, Kellogg’s has acknowledged that it is entertaining the prospect of selling the plant company (for more information on the proposed split, you can visit Kellogg’s). official press release here,
Why partition, and why now?
In recent years, Kellogg’s famed cereal brands have slipped in popularity and profits on the back of its global snacking portfolio. As more Americans enjoy fast-food breakfasts on the go, boxed cereal just doesn’t cut it anymore. And although the pandemic lockdown brought back the sit-down good-morning, sales declined when the world reopened in 2021.
Since, Kellogg’s own brands have been forced to compete for money and time. Partition hopes to fix this problem. Or as Kellogg’s CEO Stel Kahlen put it: “[Now]Frosted Flakes doesn’t need to compete with Pringles for resources.”
But there is more to the story than this.
lighten the load
Kellogg’s is a large, multifaceted company with spoons in many cereal bowls. While this allows it to take risks and pump out products, it also makes it cumbersome. managing so many brands and type The product means it’s easy for problems and good ideas to fall through the cracks.
What’s more, Kellogg’s is in a poor position to keep pace with the times while continuing to expand its portfolio. As Kahlen noted in Kellogg’s press release, the company hopes that reshaping its portfolio will allow each business to achieve its true “standalone potential” and “align its resources to their specific strategic priorities.” And will guide you better.”
In return, Kellogg believes its independent companies will have the necessary control and dexterity to:
- Expand in their unique markets
- Focus capital and resources where each brand is needed
- and take advantage of opportunities for independent development
Most of all, segmentation management structures and resources will allow each company to do this without competing brands in its own portfolio.
Shedding “Group Discount”
For many large companies, operating so many brands and products under one umbrella constitutes a so-called “group discount”. Essentially, this occurs when a company’s valuation is less than “the sum of its parts,” which implies should Happen.
By dividing a large business into smaller, segment-specific pieces, each company’s valuation can rise (or fall) to match its value. For a burgeoning company like Kellogg’s, it could make a big difference.
now is the right time
Large corporate splits are not particularly uncommon. However, they crop up less frequently in food production areas. In fact, the last major split happened when Kraft left Mondelez in 2012.
Kellogg’s began evaluating its portfolio in 2018 when it began shifting resources into high-growth categories like snacks. The pandemic foreshadowed further change and heavy investment, perhaps from a sudden grain rush. But as the company begins to grow again, leaders appear ready to take the next step.
More than firm: Kellogg’s stock will also split
So, Kellogg’s is splitting. Cereals and snacks won’t fight anymore. But what does this mean for its valued investors?
Luckily, Kellogg’s has them in mind. If it proceeds as intended, the proposed split would result in a “tax-free distribution” of shares of both North America Grain Company and Plant Company. Anyone who invested in the Kellogg Company prior to the spin-off will receive their new shares based on a ratio relative to their holdings at the record date.
Additionally, investors who have not invested in Kellogg’s, or who wish to increase their investment prior to the divestiture, should consider the value and potential of each individual company. Although both smaller spin-offs have different profiles and cater to different markets, they each have a certain appeal.
For starters, the two smaller companies make attractive takeover candidates—and Kellogg’s has already admitted that the plant is open to selling the company. If the acquisition happens, investors will benefit from a healthy purchase premium.
Even without the acquisition, the plant company could trade at a higher multiplier as a “pure-play” in a fast-growing sector, rather than the hidden assets in the old, traditional business.
In addition to the specifics of each company, simply becoming a lightweight, newly-structured entity will become its own asset. From culturally and regionally unique penetration and product creation to capital and marketing allocation to better capitalize on consumer preferences, these smaller companies may be able to move faster and smarter than the bulky Kellogg brand .
For its investors, it provides all its benefits.
The news is exciting, but don’t count on it to take stock
Certainly, news on Kellogg stock is worthy of discussion and the rise in stock prices could be for a few trading sessions.
But for long-term investors who hope to build real wealth, investing and stock picking The news alone is… well, bad news. Rarely tries to move the market towards permanent profit (or any profit).
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