The move to split Kellogg into three standalone businesses will create entities with “significant” potential while unlocking value for the company that hasn’t yet been realized by Wall Street, CEO Steve Cahillane said in an interview.
A split of the 116-year-old Kellogg announced Tuesday would place its North American cereal business and smaller plant-based food offerings into two independent, publicly traded companies, leaving behind a faster-growing operation selling snacks globally. Each segment would focus on what it does best, and make decisions that are tailored to the company when it comes to areas like innovating, marketing and M&A.
If you “look at the three businesses and look at the sum of the parts, you’d say that yes, we’re not getting the value for the breadth and scale, for our snacking business for sure,” Cahillane said. “The best way to drive these three businesses forward is through their independence.”
Kellogg’s origins date back to the creation of Battle Creek Toasted Corn Flake Company by W.K. Kellogg in 1906, and cereal remains ingrained in the company’s roots. But the Michigan-based firm has matured into a food giant whose reach extends into other categories like snacks with RXBar and Pringles, as well as plant based, highlighted by the acquisition nearly a quarter century ago of MorningStar Farms.
If you “look at the three businesses and look at the sum of the parts, you’d say that yes, we’re not getting the value for the breadth and scale, for our snacking business for sure. The best way to drive these three businesses forward is through their independence.”
The snacking business, which was responsible for 80% of Kellogg’s $14.2 billion in sales last year, would emerge from the split with an enviable portfolio of brands. Cahillane, who will head the new company, said spinning it out could help narrow the gap with other publicly traded peers in the snacking space who “trade at significantly higher multiples than the Kellogg Company.”
Since Cahillane took over as CEO in 2017, he’s been constantly evaluating Kellogg’s portfolio, which “led us to where we are today” with the split, he said. While snacking has been a big contributor to the company’s growth, Kellogg sold a portfolio of cookies and fruit snacks, including Keebler and Famous Amos, to Ferrero for $1.3 billion in 2019 to focus on its core brands.
He said the business will have strong opportunities to grow domestically with brands it already owns, most notably with Cheez-It, Pop-Tarts and Rice Krispies Treats. The snacking business also will pursue acquisitions in the U.S. in categories where Kellogg has been successful, such as savory snacks, and in international markets where it is looking to get bigger, Cahillane noted.
The snacking space has been a hotbed of activity with companies such as Conagra Brands, Hershey and Mondelēz International joining Kellogg in introducing new snacking items and rolling up smaller brands to meet the consumer’s insatiable appetite for bites to eat.
Mondelēz announced Monday it was buying Clif Bar & Company for roughly $2.9 billion. The purchase follows the addition late last year by Hershey of Dot’s Homestyle Pretzels and its Midwest co-manufacturer Pretzels Inc. for $1.2 billion — the second-largest deal in its history.
Kellogg’s profitable plant-based foods segment, which posted roughly $340 million in net sales last year, will focus first on growing in North America before turning to global expansion. It’s possible Kellogg could decide to jettison its plant-based business altogether with the company exploring other strategic alternatives, including a possible sale.
“It is such a prized asset because it's in this plant-based space, which is growing very rapidly, with very high valuations for those public companies that are pure plays that it could be that there is a strategic acquirer out there willing to pay the premium necessary to make it interesting for us,” Cahillane.
The price tag would need to be “significant” to cover any “tax leakage” Kellogg would have to pay if it sold the business versus spinning it off, he said. Cahillane declined to say whether he has already received interest from prospective buyers.
If Kellogg decides to move forward with a spinoff, the yet-to-be-named company would lose the support of its larger parent, and enter the marketplace at a time when the plant-based category has exhibited growing pains. Publicly traded Beyond Meat has outlined a slowdown, and Maple Leaf Foods, which includes plant-based meat brands Lightlife and Field Roast, is reallocating the amount of capital and space in its supply chain to reflect a much smaller growth rate than anticipated.
Kellogg hasn’t been immune to the falloff. In the company’s most recent earnings call in May, Cahillane said consumption was down from two years ago, when the MorningStar brand was seeing a compound annual growth rate in the mid-teens. Household and penetration gains, once surging, have paused.
Cahillane said this week the recent challenges impacting the segment are “more of a blip,” and that the category as a whole will continue to benefit from rising consumer demand for products that are better for the environment and are healthier to eat.
The alternative meat space was among the biggest beneficiaries in food during the pandemic as more shoppers tried products, leading to a flood of new entrants into the segment where not all of them “had the highest-quality offerings,” Cahillane said.
“You get a natural shakeout that occurs, and then the strong businesses start to perform well and MorningStar is clearly one of those very strong businesses,” he said, noting the brand’s widespread recognition and shelf space in stores. “That sets itself up very well for long-term success in a category that I think still has great, great potential.”
The transactions are expected to be completed by the end of 2023.
Nidhi Chauhan, a senior consumer analyst at GlobalData, applauded the split, calling it “a logical move and one that might provide the necessary stimulus to its overall growth as it looks to focus on the core snacking business.” The savory snacks business is expected to grow at a compound annual growth rate of 4.4% between 2021 and 2026 to a global value of roughly $232 billion, 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,” Chauhan said.
While some analysts on Wall Street applauded the decision, Erin Lash, a senior director with financial services firm Morningstar, said in a note that the planned split will destroy value. She said Morningstar expects to lower its fair value estimate on Kellogg to $83 per share as a result of the pending split and the dis-synergies from reduced scale and added back-office functions.
“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,” Lash said. “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.”
She said Morningstar could see both of the spinoffs being scooped up by strategic or financial buyers. Even after reeling from a fire and strike last year, Kellogg’s cereal business has room to improve its margins compared to its competitors and an acquirer could be attracted by the prospects of adding a cash-generative business. In the case of plant-based alternatives, Lash said “peers are likely salivating at the opportunity to add this established yet fast-growing business to their mix.”
The split will mark a major shift for Kellogg’s storied cereal business that encompasses brands like Frosted Flakes, Froot Loops and Special K, which were once growth drivers for the company. After struggling for years as people turned to more portable options or abandoned morning breakfast altogether, the pandemic prompted many homebound consumers to rediscover cereal.
Kellogg, however, downplayed any meaningful growth in the space going forward, predicting the business will “generate stable net sales over time” while it focuses on boosting profit margins and regaining lost market share. The company’s North American cereal business had an estimated $2.4 billion in net sales last year.
Cahillane dismissed the idea that Kellogg was moving on from cereal. He said when the names for the three units are announced, they will reflect the “history, heritage and tradition” of the company.
“We don’t see it as the end of anything — we really see it as the beginning,” he said. “There are three companies associated with Mr. Kellogg that will be healthy, strong companies going forward.”