Kellogg spinoff: Will split of cereal and plant-based food unit charge K stock price?
By Jenny McCall
11:00, 16 September 2022
The US cereal brand Kellogg Company's (K) slogan "Let's Make Today Great" couldn’t be more appropriate right now, as the group follows up on its announcement in June that it will spin-off parts of its business.
The company made a statement on Tuesday 21 June, that it plans to separate three of its businesses, including its Global Snacking Co, which produces Pringles; its North America Cereal Co, which makes Kellogg’s Rice Krispies; and its Plant. Co business, that is home to all its plant-based products. But what affect will this spin-off have on the Kellogg Company (K) stock price.
What is your sentiment on K?
Kellogg Company (K) share price chart
Will the Kellogg stock price change once split takes place?
In an interview with Capital.com in June, Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown said: “By splitting the company into three separate entities, with the cereals and plant-based businesses going it alone, Kellogg clearly has its ambitions firmly trained on its global snacks business, which already makes up the majority of its revenues.”
Kellogg Company (K) said that the split will enable each business to “unlock its full standalone potential and North America Cereal Co. will be a cereal leader in the US, Canada, and Caribbean.”
On the day of the announcement the stock price gained almost 2% and the group's share price has been up 9% this year.
In May, Kellogg (K) set a new 52-week high of $70.21. It is not a post-pandemic high; however, this was reached in July 2020 at $72.88. Nor is it an all-time high which was established four years prior when the world’s top cereal maker soared above $87.
But analysts believe the stock has some upside potential because it remains inexpensive. It is trading approximately 20% below its five-year historical average P/E.
But now that the spin-off has been announced, could Kellogg (K) stock decline?
Caution over split?
After the group's share price rose on 21 June, it appears investors grew cautious about the split and Kellogg’s stock lost the bulk of its gains by close.
The stock was a ‘hold’ rating, based on the views of 11 analysts compiled by MarketBeat at the time of writing on 16 September. The consensus view was that the K stock price has a upside of 1.2% from its current price of $70.34.
In addition, investors can expect some stock price volatility once the spin-off takes place. Following in the footsteps of GlaxoSmithKline (GSK), which saw a drop in its share price after it spun-off its consumer health care division, investors may see a decline in share price as the businesses are removed from the Kellogg balance sheet, and its market capitalisation reduces.
GlaxoSmithKline (GSK) share price chart
What will a Kellogg split look like?
Kellogg (K) will separate into three independent companies and will spin-off its US, Canadian and Caribbean cereal, and plant-based businesses which, according to the company, represent approximately 20% of its net sales in 2021.
The remaining business, which accounts for 80% of net sales in 2021, is focused on global snacking, international cereal, and noodles, as well as its North American frozen breakfast.
The company hopes to complete its spin-off by late 2023.
What does the split mean for investors?
“The proposed spin-offs are intended to result in tax-free distributions of North America Cereal Co. and Plant Co. shares to Kellogg Company shareowners. Shareowners would receive shares in the two spin-off entities on a pro-rata basis relative to their Kellogg (K) holdings at the record date for each spin-off,” the Kellogg statement said.
Investors who aren’t invested in Kellogg (K) or want to increase their investment prior to the split, need to assess the value and potential of each company.
Why Split now?
Kellogg (K) does not want its brands to compete for money and time - well, that’s the official line.
Kellogg (K) CEO Stele Cahillane said: “[Now], Frosted Flakes does not have to compete with Pringles for resources.”
But there are other elements to consider, managing so many brands and different types of products can lead to a lack of innovation.
Cahillane said: “These businesses all have significant standalone potential, and an enhanced focus will enable them to better direct their resources toward their distinct strategic priorities.”
The company is hoping the split will allow the group's to expand into their unique markets, focus capital and resources where each brand needs it and capitalise on growth opportunities.
With that said, Kellogg (K) is also hoping that by splitting into smaller segment areas, each company’s valuation can then rise or fall to match its worth.
Global Snacking Co.
The Global Snacking co. accounts for $11.4bn in net sales and is a “leading company in global snacking cereal and noodles.”
North America Cereal Co.
The North America Cereal Co. is the second largest division and is worth about $2.4bn in net sales. The group said it “will be a leading cereal company in the US, Canada, and Caribbean, with a portfolio of iconic, world-class brands and compelling opportunities for investment and profit growth.”
Plant. Co.
The final company that will be spun-off by Kellogg is its Plant. Co., which accounts for $340m in net sales and the company said it will be a “leading, profitable, pure play plant-based foods group.”
“Anchored by the MorningStar Farms brand, with a significant opportunity to capitalize on strong long-term category prospects by investing further in North America penetration and future international expansion,” the Kellogg statement said.
