Kellogg Company Announces Plan To Separate Into Three Independent Publicly Traded Companies
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Deal Overview

On June 21, 2022, Kellogg
K
Company (NYSE: K, $67.92, Market Capitalization: $22.95 billion), a global leader in manufacturing and marketing of snacks and convenience foods, announced its plan to separate North American cereal and plant based foods businesses, resulting in three independent public companies.

The proposed spin-off s will result in North America Cereal Co. (SpinCo 1), which includes the Company’s cereal business in the U.S., Canada, and Caribbean market and Plant Co. (SpinCo 2), a pure-play, plant-based foods company which includes MorningStar Farms brand. The remaining business (Global Snacking Co) would focus on global snacking, international cereal and noodles, and North America frozen breakfast. The capital structures, dividends, governance, and other matters for each business will be announced later. After the separations, management is committed to maintaining an investment-grade credit rating for Global Snacking Co. (RemainCo). Moreover, the Company expects to maintain a strong aggregate dividend and return-on-capital profile across the three businesses. The independent dividend and capital structure policies for each business are expected to be competitive relative to their relevant peers.

The transactions are intended to result in tax-free distributions of North America Cereal Co. (SpinCo 1) and Plant Co. (SpinCo 2) shares to Kellogg Company shareholders. Shareholders would receive shares in the two spinoff entities on a pro rata basis relative to their Kellogg holdings at the record date for each spin-off . Furthermore, the Company expects to complete the split by the end of 2023, with the North America cereal Co. (SpinCo 1) potentially separating first, followed by Plant Co. (SpinCo 2). The transactions will follow the satisfaction of customary conditions, including reviews and final approval by Kellogg’s Board of Directors, receipt of an Internal Revenue Service ruling and relevant tax opinions with respect to the tax-free nature of the transactions, the effectiveness of appropriate fi lings with the U.S. Securities and Exchange Commission, and the completion of audited financials of the independent companies.

Although Kellogg has not yet named the individual companies, Kellogg Company’s three international regions -Europe, Latin America, and the Asia Pacific, Middle East, and Africa (AMEA)- will remain almost entirely intact within Global Snacking Co (RemainCo). With Steve Cahillane, remaining Chairman and Chief Executive Officer of Global Snacking Co. North America Cereal Co. and Plant Co. will remain headquartered in Battle Creek, Michigan. Global Snacking Co., will maintain dual campuses in Battle Creek and Chicago, Illinois, with its corporate headquarters in Chicago. The Company will begin incurring pretax expenses related to executing the transactions and setting up the companies. Goldman Sachs is serving as a lead financial advisor, along with Morgan Stanley
MS
& Co. LLC, and Kirkland & Ellis LLP is acting as a legal advisor.

Deal Rationale

Kellogg’s proposed split into three publicly traded companies is similar to the break-up of other large, diversified companies. The Board of Directors and management have continually explored opportunities to capitalize on consumer and market trends to transform Kellogg’s portfolio and increase long-term shareholder value. The transaction is expected to create value for the shareholders by unlocking their full standalone potential. It is worth noting that the current conglomerate business structure is weighing down on the company’s snacking business and attracting lesser valuation compared to its peers. The Company’s global snacking business (80% of FY21 revenue) could earn a higher valuation closer to its peer Mondelez International
MDLZ
Inc. after separating from Kellogg’s North American cereal and plant-based foods units. Based on Mondelez’s valuation of 3.5x enterprise value on its 2021 sales, the remaining snacks business would be worth about $40 billion, ~$10 billion above current levels.

Over the years, Kellogg has transformed its portfolio to enhance performance and increase long-term shareowner value, and this announcement is the next step in that transformation. In 2018, the Company announced a plan to shift its resources toward its highest-growth categories, like snacks. In 2019, Kellogg sold its cookie, pie crust, ice cream cone and fruit business to Ferraro Group. The successful execution of these actions has expanded Kellogg’s portfolio, resulting in a scaled global snacking business and a significant emerging market presence, complemented by strong and profitable breakfast and plant-based foods businesses. The outcome of these strategic actions has been improved growth (net sales rose 3% YoY in FY21), with momentum sustained into 2022. After several years of transformation and improving results, the Company believes it is the right time to separate the businesses to pursue their differentiated strategic priorities.

The spin-off s will better position each business to unlock its full potential by creating independent public companies. As independent companies, all three businesses will be better positioned to focus on their distinct strategic priorities, with financial targets that best fit their markets and opportunities and execute with increased agility and operational flexibility. The spinoff will enable more focused capital allocation and resources in a manner consistent with those strategic priorities, realizing improved outlooks for profitable growth, and shaping distinctive corporate cultures and rewarding career paths for employees of each company. Hence, each standalone company will have a greater strategic focus and operational flexibility and direct capital and resources toward unlocking growth, regaining category share and restoring and expanding profit margins. The investors will now be able to value each Company based on its distinct operational and financial characteristics and invest accordingly.

In case of North America Cereal Co., U.S. cereal sales have been waning for years as consumers moved to more portable products, like energy bars. They saw a brief spike during pandemic lockdowns when more people sat down for breakfast at home; however, sales fell again in 2021. As a standalone company, North America Cereal Co. will have a greater strategic focus and operational flexibility and will direct capital and resources toward unlocking growth, regaining category share, and restoring and expanding profit margins. Plant Co. will be a pure-play, plant-based foods company anchored by the MorningStar Farms brand. Plant Co. has a significant opportunity to invest in further growth by capitalizing on the strong secular category tailwinds, building awareness and penetration in North America, and expanding internationally. As an independent business, Plant Co. will have the opportunity to build on its strong base of growth and profitability, focusing its resources and investments on capitalizing on strong category prospects by building awareness and penetration in North America and expanding internationally in the future. While Kellogg intends to separate Plant Co. as an independent business through a spin-off , it is also exploring other strategic alternatives such as possible sale to create value for shareholders.

Company Description

Kellogg Company (K) (Parent)

Headquartered in Battle Creek, Michigan, Kellogg Company is a manufacturer and marketer of snacks and convenience foods. The Company mainly operates in snacking, cereal, and plant-based foods businesses. It’s segments include North America, Europe, Latin America and AMEA (Asia Middle East Africa). Its principal products are snacks, which include crackers, savory snacks, toaster pastries, cereal bars, granola bars and bites, and convenience foods, which include ready-to-eat cereals, frozen waffles, veggie foods and noodles. They are sold to retailers through direct sales forces for resale to consumers. The Company’s snacks brands are marketed under brands such as Kellogg’s, Cheez-It, Pringles, Austin, Parati and RXBAR
AR
. Its cereals and cereal bars are generally marketed under Kellogg’s name, with some under the Kashi and Bear Naked brands. The Company’s frozen foods are marketed under the Eggo and Morningstar Farms brands. The Company also markets crackers, crisps, and other convenience foods, under brands such as Kellogg’s, Cheez-It, Pringles, and Austin, to supermarkets in the United States through various distribution methods. The Company has manufactured in over 21 countries and marketed in approximately 180 countries. In FY21, the Company generated total sales of $14.2 billion.

Post-Spin-off , Global Snacking Co. will be a leading company in global snacking, international cereal and noodles, and North America frozen breakfast, with iconic, world-class brands and strong underlying growth momentum and profitability. Kellogg Company’s three international regions will remain almost entirely intact, becoming part of Global Snacking Co. with an estimated FY21 net sales of $11.4 billion and estimated EBITDA of approximately $2.0 billion on an adjusted basis, based on preliminary allocation assumptions. Nearly 60% of its net sales come from global snacks, participating in growing categories led by 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, featuring world-class brands such as Kellogg’s, Frosties / Zucaritas, Special K, Tresor / Krave, Coco-Pops, and Crunchy Nut, among others.

North America Cereal Co. (Spin-Off 1)

Post Spin-Off , North America Cereal Co. will focus on ready-to-eat cereal in the U.S., Canada, and the Caribbean. It will be a cereal leader in the U.S., Canada, and the Caribbean, with beloved brands, a heritage of innovation, and more than a century of operational success. North America Cereal Co. had estimated FY21 net sales of $2.4 billion and estimated EBITDA of approximately $250 million on an adjusted basis, based on preliminary allocation assumptions. The business focuses on ready-to-eat cereal in the U.S., Canada, and the Caribbean. North America Cereal Co.’s portfolio comprises iconic, world class brands such as Kellogg’s, Frosted Flakes, Froot Loops, Mini-Wheats, Special K, Raisin Bran, Rice Krispies, Corn Flakes, Kashi and Bear Naked. The proposed management team for North America Cereal Co. will be announced later.

Plant Co. (Spin-Off 2)

Post Spin-Off , Plant Co. will be a pure-play, plant-based foods company, including the MorningStar Farms brand. The business has a proven winner with the MorningStar Farms brand, which Kellogg has grown since its acquisition 20 years ago to have the highest share and household penetration in the frozen vegetarian/vegan category. North America Cereal Co. had estimated FY21 net sales of $340 million and estimated EBITDA of approximately $50 million on an adjusted basis, based on preliminary allocation assumptions.

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