Breaking news: Kellogg Company splits into three

21-Jun-2022 - Last updated on 21-Jun-2022 at 14:52 GMT

The Pringles, Special K and Eggo maker is making a bold move to separate into three independent companies, spinning off its US, Canadian and Caribbean cereal and plant-based businesses, which collectively represented approximately 20% of its net sales in 2021.

Kellogg’s Board of Directors has approved the tax-free spin-offs, which will result in three independent public companies, each “better positioned to unlock their full standalone potential”, said the company.

Names of the entities are still to be determined, but comprise of the following:

Global Snacking Co. – a $11.4bn unit positioned to be a leader in the snacks, cereal and noodles, and North America frozen breakfast sectors
North America Cereal Co. – a $2.4bn division geared to become the leading cereal company in the US, Canada and Caribbean
Plant Co. – a $340m business slated to be a profitable, pure-play plant-based foods company anchored by the MorningStar Farms brand.

“Kellogg has been on a successful journey of transformation to enhance performance and increase long-term shareowner value,” said Steve Cahillane, Kellogg Company’s chairman and CEO.

“This has included re-shaping our portfolio, and today's announcement is the next step in that transformation.

“These businesses all have significant standalone potential, and an enhanced focus will enable them to better direct their resources toward their distinct strategic priorities. In turn, each business is expected to create more value for all stakeholders, and each is well positioned to build a new era of innovation and growth.”

Strategic rationale

According to Kellogg’s, the proposed separations create “greater strategic, operational and financial focus for each company and its stakeholders, and will build on Kellogg’s current momentum".

In recent years, the company has adopted an aggressive strategy to provide its portfolio a wider geographical footprint, while shifting it towards faster-growing categories, such as snacking. As such, it has directed resources and investments toward growth categories and markets, as well as emerging markets, and strengthened its snacks business through acquisitions, divestitures and freeing up of resources by exiting a direct-store delivery.

After several years of transformation and improving results, Kellogg now believes it is the right time to separate its focus, so each may pursue their particular strategic priorities.

Global Snacking Co.

The Global Snacking Co. is expected to enhance its leadership position in the global snacking, international cereal and noodles, and North America frozen breakfast categories.

Kellogg Company’s three international regions – Europe, Latin America, and Asia Pacific, Middle East, and Africa (AMEA) – will remain almost entirely intact within this unit, headed by Steve Cahillane as chairman and CEO.

In 2021, this unit’s brands brought in around $11.4bn in net sales and EBITDA of approximately $2bn on an adjusted basis, based on preliminary allocation assumptions.

Nearly 60% of its net sales come from iconic, world-class brands, including Pringles, Cheez-It, Pop-Tarts, Kellogg's Rice Krispies Treats, Nutri-Grain, and RXBAR, among others.

Less than a quarter of its net sales come from cereal in international markets, from brands like Kellogg's, Frosties (Zucaritas), Special K, Tresor (Krave_, Coco-Pops, and Crunchy Nut, among others. By remaining with Global Snacking Co., this business “will provide scale, continuity and growth for the company's Europe, Latin America, and AMEA Regions,” said Kellogg’s.

About 10% of its net sales come from noodles in Africa, a rapidly expanding business.

The remainder, less than 10% of its net sales, comes from frozen breakfast and the world-class Eggo brand.

Geographically, North America will represent just under half of net sales, emerging markets about 30% of net sales, and developed international markets more than 20% of net sales.

In a statement, Kellogg said “this business is expected to be a higher-growth company than today’s Kellogg Company, featuring a more growth-oriented portfolio and aided by more focused resources and attention to brand building, innovation, and international expansion of world-class brands, and to building scale in emerging markets.”

It is “expected to expand profit margins through operating leverage, revenue growth management, productivity, and increasing emerging-markets scale.”

North America Cereal Co.

The North America Cereal Co. will be an independent business through a tax-free spin-off, positioned as a leader in cereal in the US, Canada, and Caribbean.

“As a standalone company, it will have greater strategic focus and operational flexibility, and will direct capital and resources toward unlocking growth, regaining category share and restoring and expanding profit margins,” said Kellogg’s.

The proposed management team will be announced at a later date.

This unit had estimated 2021 net sales of $2.4bn and estimated EBITDA of around $250m. Its portfolio comprises brands such as Kellogg’s, Frosted Flakes, Froot Loops, Mini-Wheats, Special K, Raisin Bran, Rice Krispies, Corn Flakes, Kashi and Bear Naked.

Plant Co.

Another independent business through a tax-free spin-off, however, the company said it will be exploring other strategic alternatives, including a possible sale.

Anchored by the MorningStar Farms brand, Plant Co. offers a full portfolio of plant-based offerings across multiple product segments and eating occasions.

Again, the management team will be announced at a later date.

In 2021, Plant Co. had estimated net sales of $340m and estimated EBITDA of approximately $50m, currently focused on the US, Canada and Caribbean.

Spin-off for shareholders

North America Cereal Co. and Plant Co. will both operate from Kellogg Company’s established headquarters in Battle Creek, Michigan. Global Snacking Co. will maintain dual campuses in Battle Creek and Chicago, Illinois, with its corporate headquarters located in Chicago. Kellogg Company’s three international regions’ headquarters in Europe, Latin America and AMEA will remain in their current locations.

The proposed spin-offs are intended to result in tax-free distributions for Kellogg shareowners.

Walid Koudmani, chief market analyst at financial brokerage XTB commented on the move, "Kellogg Co stock jumped more than 8.0% before the opening bell after the iconic cereal producer [announced] plans to separate into three independent companies due to tax reasons.

"The company will spin off its North American cereal business and plant-based division, which accounted for about 20% of its revenue last year in two separate entities. Both groups will remain based in Battle Creek, Michigan while the third company will operate in the snacks sector, which accounted for approximately 80% of its overall sales and will focus on business divisions such as frozen breakfast, noodles and snack foods with a new global headquarters to be based in Chicago. Despite the fact that this will take some time to be implemented, investors reacted positively to the news and we could be seeing some renewed interest in the company in the short term."

The spit-off of North America Cereal Co. and Plant Co. are expected to be completed by the end of 2023, following customary conditions.

Goldman Sachs is serving as lead financial advisor, along with Morgan Stanley & Co. LLC, and Kirkland & Ellis LLP is acting as legal advisor.

Kellogg will provide updates throughout the process via a dedicated website.