As I am sure you’ve seen, the big CPG news Tuesday was that Kellogg will become three separate companies. Management will focus on the snacks/international business (I’ll call it Snack Co.) and plans to spin off the North American cereal business (Cereal Co.) and the plant-based businesses (Plant Co.) into separate entities, with their names to be determined.
The separation is expected to be completed by the end of 2023. Here’s why I think this strategy makes sense for investors:
Snacking is where the value is
Typically when publicly traded companies are broken up, it’s because investors and the board believe that the sum of the parts will be valued more highly than the whole. Kellogg is no exception. While management described part of the rationale as relating to focus within segments and not having to compete with other segments for capital, I believe chasing a higher multiple for Snack Co. is the primary rationale in this case and a sound one that should more than offset dissynergies associated with the breakup.
Snack Co. is expected to grow its top line in the high single digits compared to the expectation of flat revenue for Cereal Co. and an uncertain, but possibly stellar, revenue trajectory for Plant Co. Snack Co. revenue growth is expected to come both from consumers snacking more often, a pandemic-era habit that seems to be sticking, and international growth, for which there is a lot of runway.
There is already a road map for Kellogg selling American snacks to the world. Pringles became a true international powerhouse brand after Kellogg’s acquisition in 2012, but within the Kellogg snacking portfolio, it is an exception. Other valuable snacking brands such as Pop-Tarts, Cheez-It, Eggo, Nutri-Grain and Rice Krispies are primarily North American brands, for now, but early indications are that there is plenty of demand from overseas markets and ample room for international expansion.
The snacking international growth thesis is the type of rationale that gets investment managers to add a name to a growth-at-a-reasonable-price portfolio within a sector that remains defensive. Valuation multiples for Mondelez (snacking giant best known for Oreo cookies) show that Wall Street prefers snacking to cereal. According to investment site Koyfin, Mondelez is trading at 20.2x forward EPS, nearly four turns ahead of Kellogg’s 16.4x forward EPS multiple. Meanwhile, cereal giant General Mills is trading near Kellogg at 17.1x forward EPS. I expect the debate surrounding the shares going forward to center around whether investors will be willing to pay a Mondelez-like multiple for Snack Co.’s earnings.
Cereal supply chain issues and plant-based volatility have been distractions
I mentioned Kellogg frequently last year in The Stockout because this is a CPG supply chain newsletter and its supply chain disruptions gave me a lot of fodder. Last year, the Kellogg cereal business experienced a major strike (with plenty of union satire of Tony the Tiger carrying picket signs), a disruptive fire and other supply chain issues that caused the cereal business to lose market share. At times, Kellogg imported cereal manufactured overseas as a stopgap. The cereal business is not typically so challenging and Kellogg is currently on a path toward regaining lost market share. I expect the resulting Cereal Co. following the spinoff to be an appropriate investment for a relatively stable income-based portfolio. Management’s comments suggest that the dividend would be similar to competitors; I believe the benchmark there is General Mills’ 3% dividend yield.
Kellogg stresses that its plant-based foods business is profitable with $50 million in EBITDA, which should make the company’s plant-based segment less speculative than its competitors. Still, the plant-based category has attracted a lot of speculative investment and has been highly volatile. That’s not what an investor in Cereal Co. or even Snack Co. wants exposure to. Plant-based has fallen out of favor in the past year (to be fair, all speculative investments have fallen out of favor) as illustrated by a more than 80% one-year decline in the shares of Beyond Meat. I believe that is what has delayed the potential Impossible Foods IPO. Plant Co. will give investors another pure-play ticker plant-based meat alternative category. I imagine that will attract investors who want exposure to the plant-based category without investing in Beyond Meat. Another public name in the space should make the plant-based space easier to value, which is challenging for such an early-stage category.
To subscribe to The Stockout, FreightWaves’ CPG supply chain newsletter, please click here.