Milling & Baking News - June 28, 2022 - 14

TUES | 06 28 202 2
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Kellogg to spin off plant-based,
North American cereal businesses
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 our
strong Kellogg Co. values and rewarding
career paths for employees of each company. "
Both
the North American cereal and
plant-based foods businesses could be
ripe for acquisition, said Erin Lash, sector
director for Morningstar, a financial services
firm not associated with MorningStar
Farms.
" Kellogg's decision mirrors what we've
seen from other consumer product firms
over the past decade as Kraft/ Mondelez,
Conagra/Lamb Weston, Sara Lee and
Fortune Brands have all broken up their
individual businesses, but in this instance,
we could see both of the spin-offs being
scooped up by strategic or financial buyers, "
she said. " In the case of Kellogg's plant-based
alternatives, we think peers are likely salivating
at the opportunity to add this established
yet fast-growing business to their
mix as it has flaunted retail sales marks in
the high single digits for the better part of
the past four years despite being capacity-constrained. "
Management
teams to lead both the
North American cereal and plant-based
foods businesses will be announced later,
according to the company. Both the North
American cereal and plant-based businesses
initially will have their headquarters
in Battle Creek.
INVESTING IN CEREAL
" No longer part of a snacks-dominated
portfolio, North America Cereal Co. will
be able to focus its resources on strengthening
the business through investments
in its portfolio, packaging capabilities and
productivity, " Mr. Cahillane said. " With
this enhanced focus, North America
Cereal Co. is expected to generate stable
net sales over time, consistent with the
category's long-term trend with improving
profit margins that will drive profit
growth, higher cash flow and increased
return on invested capital. In addition to
better and more reliable in-market and
financial performance, North America
Cereal Co. will be set up with financial
flexibility from a balance sheet perspective
and with an attractive dividend. "
Kellogg's US cereal business is still in
the " early innings " of restoring distribution
and merchandising activity following
KELLOGG PLAN TO SPLIT UP COMPANY
FAILS TO IMPRESS SOME ANALYSTS
A
nalysts gave mixed reviews to the Kellogg
Co.'s plan to split into three companies:
global snacks, North American cereal and
plant-based. Credit Suisse maintained its target
price for the Kellogg business while Morningstar
lowered its value estimate per share.
The announcement came June 21 when Kellogg's
stock price on the New York Stock Exchange
closed at $68.86 per share, which was up from a
close of $67.54 on June 17. The stock price fell to
$67.92 by the close of June 22.
Nidhi Chauhan, senior consumer analyst at
GlobalData, called Kellogg's plan a " logical " move.
" This trend is becoming increasingly common
in the consumer goods industry, especially as
businesses have faced unprecedented challenges
in the last couple of years, starting with the global
pandemic in 2020 and now the Russia-Ukraine
conflict and subsequent rising inflation and supply
chain issues, " she said. " Restructuring such as
this is one way of finding growth opportunities as
economies have slowed down and consumers are
tightening their purse strings. "
The announcement provided clearer strategy
for Kellogg's US cereal and MorningStar Farms
brand, said Robert Moskow, a research analyst
with Credit Suisse.
" However, in our view, these two assets are too
small to drive a material 'unlock' for valuation, even
if they operate more effectively independently, " he
said. " In addition, it is difficult to ascribe a significantly
higher valuation multiple for the much larger
global snack company (80% of sales) as a standalone
business given that the spin does not reveal any
new information about it or clear the way for better
operating performance. "
Credit Suisse estimates a 4% downward
revision to the company's EBITDA baseline from
dis-synergies, including $35 million of stand-alone
costs for the North American cereal company
14
MILLING & BAKING NEWS
and the plant-based company and $55 million of
stranded overhead for the global snacks company.
" Is this a spin-off or a slim-down? " Mr. Moskow
said. " We look at this transaction as another
example of a food company trying to slim down
its portfolio to improve its long-term growth rate
rather than as a harbinger of bigger spin-offs to
come. Smucker, Mondelez and General Mills have
all announced significant divestitures over the past
12 months as well. That said, investors may wonder
whether Campbell Soup will follow this theme and
consider splitting their Snacks and Meals divisions
to unlock a higher valuation multiple. "
Morningstar expects to lower its Kellogg fair value
estimate to $83 per share from its current discounted
cash flow intrinsic valuation of $88 per share, said
Erin Lash, sector director for Morningstar.
" Despite the increased focus that management
claims this should afford, we don't think this strategic
action stands to enhance Kellogg's competitive
position or financial prospects, " Ms. Lash said.
" In our opinion, the motivation leans more toward
unlocking a higher multiple for the faster-growing
snack business once it's unencumbered by the
more mature North American cereal brands. " MBN
bakingbusiness.com
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Milling & Baking News - June 28, 2022

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