Kellogg Shares Pop on Plan to Split Into 3 Different Businesses

Ticker Symbol: K

Food giant Kellogg said in a filing today that the company plans to split into three independent and separate companies to generate better shareholder returns. The conglomerate, known globally as a powerhouse in the cereals business, saw its shares trade up 2.5% in the morning trading session on the news.

Chief Executive Officer Steve Cahillane said in a statement that the split would allow the three different segments of the existing business to respond quickly to changing market dynamics, enhance management focus, and direct resources more efficiently to their distinct strategic priorities. The names and leadership teams of the three businesses have not yet been decided.

The split will separate one entity into the snacks and international cereals business, the second into the U.S. cereals business, while the third and smallest division would be a pure-play plant-based foods operations. The global snacks business had a top line of $11.4 billion in 2021, while the other two businesses had sales of $2.4 billion and $340 million, respectively.

Kellogg also said that it expects the spinoffs to be tax-free but will await final guidance from the Internal Revenue Service. The company expects the deal to be finalized by the end of 2023. The separation and spinoffs are subject to final board approval and shareholders would receive shares in the two spinoff companies on a pro-rate basis based on their holding in Kellogg’s.

The global snacking business is the largest and most profitable of the three divisions at the firm.  It includes brands such as Cheez-It, Pringles, Pop-Tarts, and Eggo. The snacks division also contains the company’s fast-growing noodles business in Africa, which comprised 10% of the division’s sales last year. North American operations represent 50% of the revenue for this business.

The cereals business has the largest market share in its’ category and is considered a low but stable growth operation. It includes brands such as Rice Krispies, Froot Loops and Special K. Management of that business would have to focus on supply-chain disruptions and remerging from union strikes at plants in the U.S. The company should be able to improve profit margins and grow market share in the near term.

The plant-based enterprise is the youngest and fastest-growing of the three but has the lowest margins and could be the riskiest equity investment. It has also been facing increased competition from new entrants in the space. Share performance of plant-based peers such as Oatly and Beyond Meat has also been abysmal lately. This division could earn the lowest valuation of the three businesses upon the spinoff.

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