What Kellogg’s stock split means for investors
Key points to remember
- Kellogg shares rose on Tuesday after the company announced plans for a corporate split to make the 116-year-old cereal conglomerate more nimble
- Names and details will come later, but the company has confirmed that the spinoff should be finalized by the end of 2023.
- Shares of Kellogg closed nearly 2% higher for the day, while the S&P gained nearly 2.5%
Kellogg stock jumped more than 8% in premarket trading before falling back to end Tuesday up just 2%. The excitement of the early days stemmed from a press release detailing the 116-year-old famous cereal brand’s preliminary plans to split the company into three separate businesses. Kellogg is trading up almost 6.5% for the year.
Despite Kellogg’s morning boost, it’s hard to determine how much of his daily performance is attributable to the news. In fact, the broader S&P 500 gained nearly 2.5% in Tuesday’s session. Given that Kellogg stock lost most of its gains at the close, it seems likely that investors in recent days have approached the proposed split with more caution.
Still, the news is fresh and it’s not every day that a company suffers a three-way split. (Especially in the food industry.) So, let’s take a look at Kellogg’s delicious surprise and what it means for investors.
What a Kellogg split looks like
So far, detailed details about Kellogg’s split remain somewhat sparse. The company said it would release official company names, capital structures, governance and similar matters at later dates.
That said, Kellogg has confirmed that its domestic and international headquarters will remain unchanged. The company also hopes to complete its spin-offs by the end of 2023, barring any hiccups in the audit and regulatory approval process.
Assuming all goes according to plan, the goal is to spin Kellogg’s grain and crop operations in the United States, Canada and the Caribbean into separate businesses. In total, its spin-offs will represent around 20% of its 2021 revenue.
Here’s what else we know.
“Global Snacking Co.”
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) will operate under “Global Snacking Co.”
Global Snacking Co. will contain Kellogg’s snack brands, international cereal and noodle segments, and North American frozen breakfasts. Popular snack and breakfast brands included in this umbrella include Pringles, Cheez-It, and Eggos.
The company estimates that in 2021, global snacks alone accounted for 60% of the company’s net sales.
“North America Cereal Co.”
The second largest entity will be “North America Cereal Co.”, which accounted for approximately $2.4 billion in sales in 2021. This segment includes the company’s leading cereal brands in the United States, Canada and the United States. Caribbean.
North America Cereal Co. intends to focus on the ready-to-eat cereal market with names such as Frosted Flakes, Special K, Raisin Bran and Froot Loops. Ideally, the spin-off will regain market share in the grain segment and drive profit and sales growth.
The final spin-off, “Plant Co.”, only accounted for some $340 million in net sales last year. Still, Kellogg touts the company as a “leading, profitable, pure-play plant-based foods company.”
The new company’s products will be anchored on the MorningStar Farms brand for its products. However, unlike the other two spin-offs, Kellogg admitted that he was considering the possibility of selling Plant Co. (For more details on the proposed split, you can see Kellogg’s official press release here.)
Why break up, and why now?
In recent years, Kellogg’s famous cereal brands have fallen in popularity — and profits — behind its global snacks portfolio. As more and more Americans enjoy breakfast on the go and fast food, boxed cereal is no longer enough. And although the pandemic shutdowns brought back the good mornings sitting, sales plummeted as the world reopened in 2021.
Since then, Kellogg’s own brands have been forced to compete for money and time. The split hopes to remedy this problem. Or as Kellogg CEO Stele Cahillane put it:[Now]Frosted Flakes doesn’t have to compete with Pringles for resources.
But there is more to the story than that.
Lighten the load
Kellogg is a large, multi-faceted company with spoons in many cereal bowls. While this allows him to take risks and pump stuff, it also makes him unwieldy. Managing so many brands and types product means it’s easier for problems and good ideas to slip through the cracks.
All that to say that Kellogg is in a bad position to keep pace while continuing to expand its portfolio. As Cahillane noted in Kellogg’s press release, the company hopes the overhaul of its portfolio will allow each company to reach its true “autonomous potential” and “better direct its resources to its distinct strategic priorities.”
In return, Kellogg believes its independent companies will have the control and agility to:
- Expand in their unique markets
- Focus capital and resources where every brand needs them
- And capitalize on independent growth opportunities
Importantly, the separation of management structures and resources will allow each company to do this without the brands competing within their own portfolio.
Get rid of the “conglomerate discount”
For many large companies, operating so many brands and products under one umbrella constitutes a so-called “conglomerate reduction”. This basically happens when a company’s valuation is lower than the “sum of its parts” implies. should be.
By dividing a large company into smaller, segment-specific pieces, each company’s valuation can rise (or fall) to match its value. For a company as heavy as Kellogg, that can make a substantial difference.
It’s just the right time
Large company spin-offs are not particularly uncommon. However, they tend to appear less frequently in the food production sector. In fact, the last major split occurred when Kraft split Mondelez in 2012.
Kellogg began pricing its portfolio in 2018 when it began shifting its resources to higher-growth categories like snacks. The pandemic has halted further changes and drastic investments, perhaps spurred by the sudden grain rush. But as the company begins to grow again, executives seem ready to take the next step.
More than the company: Kellogg shares will also split
So Kellogg is breaking up. Cereals and snacks will no longer fight each other. But what does this mean for its valuable investors?
Fortunately, Kellogg has kept them in mind. If it goes as planned, the proposed spin-off will result in “tax-free distributions” of North America Cereal Co. and Plant Co. shares. Anyone invested in Kellogg Co. before the spin-off will receive their new shares at pro rata to its assets on the date of registration.
Additionally, investors who have not invested in Kellogg, or wish to increase their investment prior to the split, should consider the value and potential of each individual company. Although the two smaller spin-offs have different profiles and cater to different markets, they each have a certain appeal.
For starters, both small companies are attractive takeover candidates — and Kellogg has previously admitted he’s open to selling Plant Co. If an acquisition goes through, investors are likely to enjoy a buying premium. healthy.
Even without an acquisition, Plant Co. may trade at a higher multiple as “pure-play” in a fast-growing industry rather than as a hidden asset in a legacy legacy business.
Beyond the specificities of each company, the simple fact of becoming a leaner and newly structured entity will become its own asset. From making culturally and regionally unique forays and products to allocating capital and marketing to better capitalize on consumer preferences, these small businesses may be able to move faster. and smarter than the heavyweight Kellogg brand.
For their investors, this offers advantages of its own.
News is exciting, but don’t rely on it to pick stocks
Of course, Kellogg’s stock news is newsworthy and could lead to a few trading sessions with stock prices rising.
But for long-term investors hoping to build real wealth, investing and stock selection on the news alone, that’s… well, bad news. Trying to time the market rarely leads to lasting profits (or profits).
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