Cereal giant Kellogg's decision to unload its cookies and fruit snacks businesses to Nutella-maker Ferrero for $1.3 billion was as much about the price as it was highlighting a shift in strategy for the two food giants.
Ferrero, which has been aggressively expanding its U.S. presence in recent years, punctuated that push with the addition of the snacks portfolio from Kellogg in July that includes well-known brands such as Keebler and Famous Amos. At the same time, Kellogg decided to unload products that were dragging down its growth in an effort to focus on its core portfolio.
"This divestiture is yet another action we have taken to reshape and focus our portfolio, which will lead to reduced complexity, more targeted investment and better growth," Kellogg CEO Steve Cahillane said in a release at the time the deal was announced. "Divesting these great brands wasn't an easy decision, but we are pleased that they are transitioning to an outstanding company with a portfolio in which they will receive the focus and resources to grow."
Since Cahillane took the top position at Kellogg in 2017, the company has focused on increasing sales rather than cutting costs. The goal has become more difficult, however, as Americans have eaten less cereal in recent years.
"This divestiture is yet another action we have taken to reshape and focus our portfolio, which will lead to reduced complexity, more targeted investment and better growth."
Erin Lash, director of consumer equity research at Morningstar, told Food Dive the Kellogg unit went for a "decent price" and that the Michigan company has been laying the groundwork for growing its revenue. She said a number of CPG companies have been pursuing strategic alternatives for portions of their businesses to focus their resources.
"This deal kind of strikes us with a similar cord in terms of what it affords Kellogg, in particular being able to invest more sufficiently to support the growth of brands like Pringles and Cheez-It and Pop Tarts, among others, from both an R&D and marketing perspective," Lash said. "I think that was the ultimate impetus behind the proposed sale."
In 2018, the businesses Kellogg is selling posted net sales of almost $900 million and operating profit of roughly $75 million. Although Kellogg bought the Keebler Foods Company in 2001 for about $3.9 billion, this deal still allows the company to streamline its portfolio.
Kellogg plans to keep the rest of its North America snacking businesses, including its crackers, salty snacks and toaster pastries brands.
Zacks Equity researchers wrote in an analyst note when the deal was announced that the proceeds from the sale are likely to be used to reduce Kellogg's debt.
"Nonetheless, the divestiture is aimed at enabling the company to increase focus on areas with higher growth potential," Zacks analysts said. "On the flip side, the deal is a deemed fit for Ferrero, as it will help the company solidify its presence in North America."
By the numbers
In 2017, the Italian candy company bought Ferrara Candy — the maker of Brach's, RedHots and Trolli — from private equity company L Catterton. Last year, it spent $2.8 billion to acquire Nestlé's U.S. candy operations, making it the third-largest confectionery company in America with brands such as Butterfinger, Baby Ruth and 100 Grand.
"For us to be a global company, we have to have a good presence here in the United States," Paul Chibe, president and CEO of Ferrero North America, told Food Dive earlier this year. "The United States has been a market where we had an opportunity to grow and kind of reach the same levels of development that we (have) in other parts of the world."
With its purchase of the Kellogg division, Ferrero is making its foray into cookies and snacks.
Jeff Robards, head of the consumer foods group at the investment bank Alantra, said earlier this year that Ferrero has been looking to grow in the U.S. by purchasing established brands that have "grown tired under current ownership, but that represent an opportunity for rejuvenation." Hostess Brands and B&G Foods also reportedly looked into acquiring Kellogg's cookie and fruit snacks brands.
"Ferrero clearly sees more value in these brands than many competing bidders, as they have been winning these auction processes," Robards said.
Simon Negri, a managing director in the consumer products practice at AlixPartners, told Food Dive the rationale for this latest deal makes sense.
"There is a nice overlay of consumer synergies between the confectionary and the cookie shoppers," Negri said. "This seems to be pretty much aligned with Ferrero's stated objectives of wanting to double the business every 10 years, and in order to do that, they are going to have to continue to increase their focus on inorganic moves or acquisitions."