A hét részvénye: Kellogg (Angol hír)

Kellogg (K.US), the US food manufacturing company, jumped on Tuesday on news of a planned separation of the company into three entities. Kellogg wants to split into three entities focusing on three different but food-related businesses - cereal, snacks and plant-based food. Analysts hint that such a move may help unlock unrecognized value. Let's take a closer look at Kellogg plans.

Kellogg to split into three companies

Kellogg announced on Tuesday that it plans to spin-off its North American cereal and plant-based food business, effectively breaking the company into three separate entities (the third will focus on global snacks business). Separation is expected to be completed by the end of 2023, although the company said that a spin-off of cereal business may occur quicker than plant-based food business. Company's executives said that spin-offs as a potential strategy for Kellogg have been considered since 2018.

North American cereal - getting rid of a burden?

The move is reasoned with desire to give each of three businesses more autonomy, allowing them to better allocate resources to their own strategic priorities. It is hard to question such reasoning but things may not be so rosy for all of three segments. North American cereal business received a boost during Covid pandemic as people stayed more at home, and as a result demand for breakfast products, like cereals, increased. However, this trend reversed as restrictions were lifted and people started to go out more - less people ate breakfasts at home and more did it on the run, for example during the commute to work. This is unlikely to change therefore a new, stand-alone cereal company is expected to have a rather bleak long-term outlook.

Global snacks - potential to unlock value for shareholders

Spin-offs are becoming an increasingly popular way of unlocking value for companies that have engaged in excessive M&A activity in the past. Some of those past acquisitions did not play out as expected and served as drag on the whole company. In other cases, like the aforementioned Kellogg cereal business, the outlook for the unit has changed and splitting the company may be more beneficial for shareholders than keeping it together.

What does unlocking value mean? It means that three separate entities may be worth more than one entity combining three different units. Take Kellogg snacks business as an example. It had around $11.4 billion in net sales last year. Multiplying this net sales figure by a 3.5x EV/sales ratio for Mondelez International (MDLZ.US), Kellogg rival in the snacks business, would value Kellogg standalone snack business at around $40 billion. Meanwhile, Kellogg - still as 3 businesses combined - has enterprise value (EV) of $31.4 billion currently.

Plant-based food - a rival to Beyond Meat?

Kellogg said that spin-off of its plant-based food business will create a pure-play company in the field. This is a potential threat to Beyond Meat, a US plant-based food company that was leading in the business for years and was one of few pure-play plant-based food companies. Beyond Meat continues to be unprofitable with around $460 million in revenue in 2021. Meanwhile, Kellogg plant-based food business had net sales of around $340 million in sales last year. Multiplying this figure by 4.77 EV/sales multiple of Beyond Meat results in enterprise value of around $1.6 billion. Kellogg executives said that each of three new entities has significant potential but the company was not providing data on segment profit therefore it remains unknown whether Kellogg plant-based food business will be profitable on a standalone basis.

Kellogg also said that it may sell plant-based food business to an interest party instead of spinning it off to shareholders but the final decision has not been made yet.

A look at the market

Announcement of spin-off plans sent Kellogg shares flying in premarket trading on Tuesday, leading to a big bullish price gap at the launch of the Wall Street session that day (orange circle on the chart below). However, optimism did not last long and a big part of this gain was erased during the session on Tuesday. The remainder of those gains was erased yesterday and stock finished trading more or less flat compared to pre-announcement levels. Stock has been trading in a $66-71 range recently and should we see a break below the support zone marked with 50% retracement of the upward move launched in the first half of March, a drop towards the lower limit of the range may be looming.

Source: xStation5