Splitting Kellogg is the best way to drive growth, CEO says

The move to split Kellogg into three standalone businesses will create entities with “significant” potential while unlocking value for the company that hasn’t yet been realized by Wall Street, CEO Steve Cahillane said in an interview.

A split of the 116-year-old Kellogg announced Tuesday would place its North American cereal business and smaller plant-based food offerings into two independent, publicly traded companies, leaving behind a faster-growing operation selling snacks globally. Each segment would focus on what it does best, and make decisions that are tailored to the company when it comes to areas like innovating, marketing and M&A.

If you “look at the three businesses and look at the sum of the parts, you’d say that yes, we’re not getting the value for the breadth and scale, for our snacking business for sure,” Cahillane said. “The best way to drive these three businesses forward is through their independence.”

Kellogg’s origins date back to the creation of Battle Creek Toasted Corn Flake Company by W.K. Kellogg in 1906, and cereal remains ingrained in the company’s roots. But the Michigan-based firm has matured into a food giant whose reach extends into other categories like snacks with RXBar and Pringles, as well as plant based, highlighted by the acquisition nearly a quarter century ago of MorningStar Farms. 


 If you “look at the three businesses and look at the sum of the parts, you’d say that yes, we’re not getting the value for the breadth and scale, for our snacking business for sure. The best way to drive these three businesses forward is through their independence.”

Steve Cahillane

CEO, Kellogg


The snacking business, which was responsible for 80% of Kellogg’s $14.2 billion in sales last year, would emerge from the split with an enviable portfolio of brands. Cahillane, who will head the new company, said spinning it out could help narrow the gap with other publicly traded peers in the snacking space who “trade at significantly higher multiples than the Kellogg Company.”

Since Cahillane took over as CEO in 2017, he’s been constantly evaluating Kellogg’s portfolio, which “led us to where we are today” with the split, he said. While snacking has been a big contributor to the company’s growth, Kellogg sold a portfolio of cookies and fruit snacks, including Keebler and Famous Amos, to Ferrero for $1.3 billion in 2019 to focus on its core brands. 

Optional Caption

Courtesy of Kellogg

 

He said the business will have strong opportunities to grow domestically with brands it already owns, most notably with Cheez-It, Pop-Tarts and Rice Krispies Treats. The snacking business also will pursue acquisitions in the U.S. in categories where Kellogg has been successful, such as savory snacks, and in international markets where it is looking to get bigger, Cahillane noted

The snacking space has been a hotbed of activity with companies such as Conagra Brands, Hershey and Mondelēz International joining Kellogg in introducing new snacking items and rolling up smaller brands to meet the consumer’s insatiable appetite for bites to eat. 

Mondelēz announced Monday it was buying Clif Bar & Company for roughly $2.9 billion. The purchase follows the addition late last year by Hershey of Dot’s Homestyle Pretzels and its Midwest co-manufacturer Pretzels Inc. for $1.2 billion — the second-largest deal in its history.

Kellogg’s profitable plant-based foods segment, which posted roughly $340 million in net sales last year, will focus first on growing in North America before turning to global expansion. It’s possible Kellogg could decide to jettison its plant-based business altogether with the company exploring other strategic alternatives, including a possible sale.

“It is such a prized asset because it’s in this plant-based space, which is growing very rapidly, with very high valuations for those public companies that are pure plays that it could be that there is a strategic acquirer out there willing to pay the premium necessary to make it interesting for us,” Cahillane.

The price tag would need to be “significant” to cover any “tax leakage” Kellogg would have to pay if it sold the business versus spinning it off, he said. Cahillane declined to say whether he has already received interest from prospective buyers.

If Kellogg decides to move forward with a spinoff, the yet-to-be-named company would lose the support of its larger parent, and enter the marketplace at a time when the plant-based category has exhibited growing pains. Publicly traded Beyond Meat has outlined a slowdown, and Maple Leaf Foods, which includes plant-based meat brands Lightlife and Field Roast, is reallocating the amount of capital and space in its supply chain to reflect a much smaller growth rate than anticipated.

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Courtesy of Kellogg

 

Kellogg hasn’t been immune to the falloff. In the company’s most recent earnings call in May, Cahillane said consumption was down from two years ago, when the MorningStar brand was seeing a compound annual growth rate in the mid-teens. Household and penetration gains, once surging, have paused.