Kellogg thinks it makes more sense apart than together

Discussion
Kellogg Co. world corporate headquarters, Battle Creek, MI – Photo: Kellogg Co.
Jun 27, 2022

Following a trend of breaking up conglomerates, Kellogg Co. last week announced plans to split into three independent companies: global snacks, North American cereal and plant-based foods.

“These businesses all have significant standalone potential, and an enhanced focus will enable them to better direct their resources toward their distinct strategic priorities,” said Steve Cahillane, Kellogg’s CEO, in a press release.

Under the plan, its North American cereal and plant-based businesses, which collectively represented only 20 percent of its sales in 2021, will be spun off. The remaining primary business is centered on snacking — Pringles, Cheez-It, Pop-Tarts, Kellogg’s Rice Krispies Treats, Nutri-Grain and RXBAR— as well as international cereal and noodles and the North America frozen breakfast unit, including Eggos.

As the fastest growing and highest margin segment, the snacking business is expected to earn a higher stock multiple as a stand-alone.

The heritage cereal business, including Frosted Flakes and Rice Krispies, is expected to see stable sales as it seeks to regain share after facing supply chain disruptions, a fire and a strike over the last year. Kellogg promises more innovation as the brands won’t be competing for resources against the massive snacking business.

The plant-based food business, led by MorningStar Farms, is profitable and offers huge growth prospects in an emerging food category. Kellogg may sell it outright.

Kellogg joins other conglomerates like General Electric, Johnson & Johnson and Toshiba that announced breakup plans late last year as well as significant divestitures announced over the last year at Smucker, Mondelez and General Mills. Many attribute the shift away from sprawling conglomerates to General Electric in the sixties after some questioned the synergies realized.

Kellogg’s stock lost ground in the days following the spinoff announcement as some analysts expressed concern about the stand-alone costs for the spun-off businesses and the stranded overhead for the continuing snacks company.

Ken Goldman, at JPMorgan, wrote in a note, “Whatever Kellogg’s triumvirate of spin-offs gains in operating and financial focus, it loses in reduced scale, dis-synergies, and the cash cost of the break-up.”

Analysts predict if the Kellogg split proves successful, more conglomerate break-ups will follow.

DISCUSSION QUESTIONS: Which business — snacks, cereal or plant-based food — benefits the most and least from Kellogg’s potential spinoffs? Is the divestiture of many mega-conglomerates healthy for the retail  industry and do you see it continuing?

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Braintrust
"Kellogg will likely be successful with their snacking business but it’s too early to understand the effect of spinning off their cereal business."

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15 Comments on "Kellogg thinks it makes more sense apart than together"


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Neil Saunders
BrainTrust

I see this move as financial engineering rather than as a decision to allow the various divisions to perform better. From a strategy perspective, Kellogg already had a degree of separation between its business units, so there is no particular advantage in formally separating them. The truth is that other divisions weren’t really starved of investment because of the snacking division: they just weren’t as innovative and forward thinking as that division so performance has been somewhat weaker. I am sure investors will make some money out of this in the short term, but I don’t see it as a particularly advantageous move in the long term.

Zel Bianco
BrainTrust

Kellogg will likely be successful with their snacking business but it’s too early to understand the effect of spinning off their cereal business which is what most consumers think of when they think of Kellogg. No one has a crystal ball that can see what will happen to the cereal category but if I were a betting man, I would say the cereal category will bounce back, especially if prices start to come down. A family size box of Kellogg’s Corn Flakes costs more than $9 at my local CVS!

Gene Detroyer
BrainTrust

As history shows us, mergers and acquisitions don’t deliver benefits for company values about 80 percent of the time. The opposite is true of spinoffs. Generally, the added performance of the spinoffs provides significant gains for shareholders.

Each of the three companies will benefit from going their own way. The focus will change, and resources will not be shared.

Today divestiture is a trend, just like mergers were a trend. This has been repeated again and again since the turn of the 20th century.

Ryan Mathews
BrainTrust

Gene,

You are right. Spinoffs often do benefit shareholders, but what about the brands, especially long term?

Ryan Mathews
BrainTrust

Well, I’m not sure there is a clear winner here, which is what may be making some analysts nervous. Cereal will likely stay more or less flat in sales with intense price pressure slowly eroding margins. Snacks, which everyone seems excited about is, I think, a more fragile category than most want to admit, especially in a period of inflation and recession. Plant-based foods? Solid niche, but a niche nevertheless. This looks more like a financial restructuring than a marketing strategy to me, but time will tell.

Ben Ball
Guest
I took interest in this weekend news as Kellogg was a long-time client back when. Neil commented that the three divisions have essentially been separate companies for years and I would agree. Others have commented that this is largely a Wall Street move and, again, I would agree. K has been a growth stock (snacks) with a value stock (cereal) ticker hung around its neck for the last five years or more. Missed the boat on that one for sure. As you point out Ryan, the high inflation/lower growth days are here but I don’t think that hurts the snack division. The irony of that market is that when consumers can’t buy big rewards for themselves they buy more little rewards. And that’s what snacks and confectionery are — little rewards. So when K spins and splits, hang on to both new issues. K (the value company) should throw off good dividends in the near term and “Q?” (the ticker formerly known as K) should be a winner in the long term. Good move by… Read more »
Ryan Mathews
BrainTrust
Ben, Always good to hear from you, but I have a couple of minor “niggles.” First of all we are about to enter a recessionary economy, something most of the current generation of CPG and retail managers and a large percentage of consumers have never faced, and which many are woefully unprepared for. At the same time, we are seeing rampant inflation with national gas prices north of $5.00. For many folks, that’s going to mean cutting down in ways unseen since the early 1970s. I totally agree with the “small rewards” theory, but not if it comes down to a choice between Pringles and protein. Also, we have no idea how the Fed will “correct” the current inflationary economy, but any Econ 101 student can tell you one of the fastest ways to curtail inflation is to continue to raise interest rates while letting unemployment rise. And finally, all CPG companies are playing with a whole deck full of Wild Cards at the moment in terms of things like raw ingredient availability and cost,… Read more »
Lisa Goller
BrainTrust

Kellogg’s plant-based food spinoff has the greatest growth potential, making it alluring to buyers. Animal-based foods show the highest price hikes due to inflation; more consumers now seek plant-based options.

Snacks are a close second due to their portability and our pandemic-fueled habit of frequent nibbling.

Kellogg’s cereal business will benefit the least. Cereal’s slow growth rate is due to dietary changes like skipping breakfast or prioritizing protein. Millennials even eschew cereal because they said they have to clean the bowl.

Divestiture can invigorate retail as companies focus on their strengths and sell sources of inefficiency.

Jeff Weidauer
BrainTrust

Kellogg is spinning off its business to focus on snacks – that’s where the money is. The cereal business is being put out to pasture; it’s a mature business with little growth potential. Plant-based foods are more of an R&D play and should be kept separate. This is a finance-driven change, not an operational one.

Scott Norris
Guest

If I were at General Mills this morning, I’d be at least running the numbers to see if acquiring the cereals to shut down competition would be worthwhile…

Peter Charness
BrainTrust

Who says there’s no fashion in finance? It used to be that companies went on buying sprees, or built new divisions to obtain significant efficiencies, now the trend is to break up conglomerates to unlock value for shareholders. I suppose either can work, depending on your strategy and objectives.

Paula Rosenblum
BrainTrust

It is true that on many levels, this is financial engineering, but I can tell you that those who favor plant-based foods are very taken aback when they find out Kellogg is the parent company.

Heck, I was. It’s probably a good move. If you’ve ever seen the chart of the few companies that actually control our prepared food supply, you would clearly see why this is happening.

Roland Gossage
BrainTrust
1 month 22 days ago

These moves to me always seem to look at short-term gains and often don’t look at the hidden cost of being separate. Shared services and buy power vs focus, multiples and share price. Time will tell.

Craig Sundstrom
Guest

I question the use of the word “conglomerate” here; it was something of a fad in the ’60s and ’70s for businesses to acquire completely unrelated businesses (e.g. Coca-Cola acquired Columbia Pictures … nowthat was a conglomerate). But a cereal and a snacks business? I would call it a “dry packaged foods” manufacturer more than a conglomerate.

The point of all this semantics is how logical I view a breakup: there very well may be synergies in marketing, research or logistics that argue against a breakup; only those intimate with the company’s operations can know for sure.

Oliver Guy
BrainTrust

This surprised me in a big way. When Gillette merged with P&G, analysts speculated it was because together they were more able to resist price squeezing from the likes of Walmart. Equally having one sales person visit a retailer (verses 2 or 3 in the new world of Kellogg’s) saves time, money and resources — arguably on both sides of the fence — notwithstanding the fact that they could be meeting different category managers inside the retailer.

wpDiscuz
Braintrust
"Kellogg will likely be successful with their snacking business but it’s too early to understand the effect of spinning off their cereal business."

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