Key Takeaways
- Kellogg stock rose Tuesday after the company announced a proposed corporate split to make the 116-year-old cereal conglomerate nimbler
- Names and details will come later, but the company has confirmed the spin-offs should finalize by late 2023
- Kellogg shares closed up nearly 2% for the day, while the S&P gained nearly 2.5%
Kellogg stock popped over 8% in premarket trading before pulling back to finish Tuesday up just 2%. The early-day excitement stemmed from a press release detailing the famous 116-year-old cereal brand’s preliminary plans to split the company into three separate ventures. Kellogg trades up nearly 6.5% for the year.
Despite Kellogg’s early-morning rise, it’s difficult to determine how much of its daily performance is attributable to the news. In fact, the broader S&P 500 gained nearly 2.5% in Tuesday’s session. Given that Kellogg stock lost the bulk of its gains by close, it seems likely that later-day investors approached the proposed split with more caution.
Still, the news is fresh, and it’s not every day a corporation undergoes a three-way split. (Especially in the food industry.) So, let’s take a look at Kellogg’s tasty surprise and what it means for investors.
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What a Kellogg split looks like
So far, in-depth details on Kellogg’s split remain somewhat sparse. The company noted it will release official company names, capital structures, governance and similar matters at later dates.
That said, Kellogg did confirm that its national and international headquarters will remain unchanged. The company also hopes to complete its spin-offs by late 2023, barring any snags in the audit and regulatory approval process.
Assuming all goes to plan, the goal is to spin Kellogg’s U.S., Canada and Caribbean cereal and plant-based businesses into separate ventures. All told, its spin-offs will represent around 20% of its 2021 net sales.
Here’s what else we know.
“Global Snacking Co.”
Under the current proposal, the bulk of Kellogg’s business (which accounted for $11.4 billion in net revenue in 2021, or about 80% of its business) will operate under “Global Snacking Co.”
Global Snacking Co. will contain Kellogg’s snack brands, international cereal and noodles segments, and North American frozen breakfasts. Popular snack and breakfast brands included under this umbrella include Pringles, Cheez-It and Eggos.
The company estimates that in 2021, global snacks alone accounted for 60% of the firm’s net sales.
“North America Cereal Co.”
The next-largest entity will be “North America Cereal Co.,” which accounted for roughly $2.4 billion in sales during 2021. This segment includes the company’s leading cereal brands in the U.S., Canada and the Caribbean.
North America Cereal Co. intends to focus on the ready-to-eat cereal market with names like Frosted Flakes, Special K, Raisin Bran and Froot Loops. Ideally, the spin-off will regain market share in the cereal segment and drive profits and sales growth.
“Plant. Co.”
The final spin-off, “Plant Co.,” only accounted for some $340 million in net sales last year. Still, Kellogg is branding the venture as a “leading, profitable, pure-play plant-based foods company.”
The new company’s products will anchor on the MorningStar Farms brand for its products. However, unlike the other two spin-offs, Kellogg has admitted it’s entertaining the possibility of selling Plant Co. (For further details on the proposed split, you can see Kellogg’s official press release here.)
Why split, and why now?
In recent years, Kellogg’s famous cereal brands have slipped in popularity—and profits—behind its global snacking portfolio. As more Americans enjoy on-the-go and fast-food breakfasts, boxed cereals simply don’t cut it anymore. And though pandemic lockdowns brought back sit-down good-mornings, sales slid when the world reopened in 2021.
Since, Kellogg’s own brands have been forced to compete for money and time. The split hopes to rectify this problem. Or as Kellogg CEO Stele Cahillane put it: “[Now], Frosted Flakes does not have to compete with Pringles for resources.”
But there’s more to the story than that.
Lightening the load
Kellogg is a large, multi-faceted company with spoons in many cereal bowls. While that allows it to take risks and pump out products, it also makes it unwieldy. Managing so many brands and types of product means it’s easier for problems and good ideas alike to fall through the cracks.
All that to say, Kellogg is in a poor position to keep up with the times while continuing to expand its portfolio. As Cahillane noted in Kellogg’s press release, the company hopes that reshaping its portfolio will allow each business to achieve its true “standalone potential” and “better direct their resources toward their distinct strategic priorities.”
In turn, Kellogg believes that its independent companies will have the control and nimbleness needed to:
- Expand into their unique markets
- Focus capital and resources where each brand requires
- And capitalize on independent growth opportunities
Most of all, splitting management structures and resources will allow each company to do this without brands competing within their own portfolio.
Shedding the “conglomerate discount”
For many large companies, operating so many brands and products under one umbrella compiles a so-called “conglomerate discount.” Essentially, this occurs when a company’s valuation is lower than the “sum of its parts” implies it should be.
By splitting a large business into smaller, segment-specific pieces, each company’s valuation can rise (or fall) to match its worth. For a company as cumbersome as Kellogg, that can make a substantial difference.
It’s just the right time
Large corporate splits aren’t particularly uncommon. However, they tend to crop up less frequently in the food production sector. In fact, the last major split took place when Kraft spun off Mondelez in 2012.
Kellogg began evaluating its portfolio in 2018 when it started shifting resources to higher-growth categories like snacks. The pandemic put a stop to making further changes and drastic investments, perhaps boosted by the sudden cereal rush. But as the company begins to grow again, leaders appear ready to take the next step.
More than the firm: Kellogg stock will split, too
So, Kellogg is splitting. The cereals and snacks will fight no more. But what does this mean for its valued investors?
Fortunately, Kellogg has kept them in mind. If it proceeds as intended, the proposed split will result in “tax-free distributions” of both North America Cereal Co. and Plant Co. shares. Anyone invested in Kellogg Co. prior to the spin-off will receive their new shares on a pro-rata basis relative to their holdings at the record date.
Additionally, investors who aren’t invested in Kellogg, or who want to up their investment before the split, should consider the value and potential of each individual company. Though both of the smaller spin-offs have different profiles and cater to different markets, they each carry a certain appeal.
For starters, the two smaller companies make attractive acquisition candidates—and Kellogg has already admitted that it’s open to selling off Plant Co. Should an acquisition go through, investors will likely benefit from a healthy purchase premium.
Even without an acquisition, Plant Co. may trade at a higher multiple as a “pure-play” in a fast-growing sector rather than a hidden asset in an old, traditional business.
Aside from each company’s specifics, simply becoming a lighter, newly-structured entity will become its own asset. From making culturally and regionally unique inroads and products to allocating capital and marketing to better capitalize on consumer preferences, these smaller companies may be able to move quicker and smarter than the heavy Kellogg brand.
To their investors, that provides benefits all its own.
The news is exciting, but don’t rely on it to pick stocks
Sure, the news on Kellogg stock is buzz-worthy and may make for a few trading sessions of increased stock prices.
But for long-term investors who hope to build real wealth, investing and stock picking on news alone is…well, bad news. Rarely does trying to time the market lead to sustainable profits (or any profits).
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