Kellogg’s breakup plan failed to effect

Battle Creek, Michelle. Analysts gave mixed reviews of Kellogg’s plan to split into three companies: global snacks, North American cereal, and vegan. Credit Suisse maintained its price target for the Kellogg business while Morningstar lowered its value per share estimate.

This announcement was made on June 21. Kellogg’s stock price rose on the New York Stock Exchange that day to $71.26 a share before closing at $68.86, up from closing at $67.54 on June 17. The share price fell to $67.92 per share. Closing June 22nd.

Nidhi Chauhan, chief consumer analyst at GlobalData, described Kellogg’s plan as a “logical” move that could provide a catalyst for overall growth.

“This trend is becoming increasingly common in the consumer goods industry, especially as companies have faced unprecedented challenges in the past two years, starting with the global pandemic in 2020 and now the conflict between Russia and Ukraine and the ensuing spike in inflation and supply chain issues,” she said. Like this is one way to create growth opportunities as economies have slowed and consumers are tightening their financial constraints.”

Robert Moscow, a research analyst at Credit Suisse, said the announcement provided a clearer strategy for Kellogg’s US grain brand and MorningStar Farms.

“However, in our view, these two originals are too small to ‘open’ an item for evaluation, even if they work more effectively independently,” he said. “In addition, it is difficult to assign a much higher valuation multiplier to the larger global snack company (80% of sales) as a stand-alone business because the turnover does not reveal any new information about it or pave the way for better operating performance. As a result, we maintain on the target price of $69 (per share) for the company.”

Credit Suisse estimates a downward adjustment of 4% to the company’s baseline EBITDA of synergies, including $35 million in independent costs for the North American grain company and plant-based company and $55 million in stranded overhead for the global snack company.

Mr. Moscow raised other food companies when discussing Kellogg’s moves.

“Is this accidental or slight?” He said. “We view this transaction as yet another example of a food company trying to shrink its portfolio to improve its long-term growth rate rather than a harbinger of greater benefits to come. Smucker, Mondelez and General Mills have also announced significant divestitures in the past 12 months as well. However, investors may be wondering if Campbell Soup will follow through on this theme and consider splitting their snack and meal sections to open up a higher valuation multiplier.”

Morningstar expects to reduce Kellogg’s fair value estimate to $83 per share from the current intrinsic discounted cash flow valuation of $88 per share, said Erin Lash, segment director at Morningstar.

“Despite the increased focus that management claims this must take, we do not believe this strategic action will enhance Kellogg’s competitive position or financial prospects,” said Ms Lash. “In our opinion, the drive is more skewed toward opening a higher multiplier to the faster-growing snack business once it’s not complicated by the more mature grain brands in North America.”

Nick Moody, equity analyst at RBC Capital Markets, LLC, New York, described Kellogg’s timeline for completing the breakup in 18 months as “rigid” and said he wouldn’t be surprised if it carried over to 2024. As for the separate companies, Mr. Moody sees takeovers looming.

“…we believe NA Cereal can be acquired by private equity firms that can use the company’s stable cash flow; for the plant-based circulation we see potential buyers across the food landscape, including Conagra, PepsiCo, Nestle, Hormel and Tyson given for their interest in the plant sector,” he wrote in a note. “We believe the global snack business can be a target or a unifier.”

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