Kellogg Co.’s plan to split into three separate companies made plenty of headlines, but JPMorgan analysts say the news isn’t “as seismic a change” as the Kraft Heinz Co. separation from its Mondelez International Inc. snack business back in 2012.
JPMorgan notes that in the case of Kraft
two-thirds of the company’s EBITDA went with Mondelez. Kraft brands include Kraft Mac & Cheese, Oscar Mayer, Kool-Aid and Grey Poupon. Meanwhile, Mondelez’s lineup includes Chips Ahoy, Honey Maid, Cadbury and Milka.
snacking business is keeping 87% of the company’s EBITDA, according to JPMorgan analysts. The components of the new Global Snacking Co., which includes the brands Pop-Tarts, Cheez-It, Pringles and Eggo, were responsible for sales of $11.4 billion in 2021, and $2 billion in EBITDA on an adjusted basis, according the the Kellogg announcement.
“In essence, therefore, we view the pending Kellogg transactions as a pair of tax-advantaged divestitures, not a blow-up of the total company,” JPMorgan writes.
“After all is said and done, the remaining SnackCo will not be that different in terms of EBITDA than total Kellogg is today (even if the portfolio is heavily altered).”
Kellogg’s other two business groups will be North America Cereal Co., which includes Frosted Flakes, Froot Loops, Special K and Apple Jacks and accounted for $2.4 billion in 2021 net sales; and Plant Co., which is composed of Morningstar Farms and had $340 million in 2021 net sales.
“Whatever Kellogg’s triumvirate of spin-offs gains in operating and financial focus, it loses in reduced scale, dis-synergies, and the cash cost of the break-up,” JPMorgan said.
JPMorgan maintained its underweight stock rating for Kellogg, and raised its price target to $67 from $64.
Credit Suisse analysts note the lack of information that was provided about the way forward for Kellogg’s Global Snacking Co.
“The announcement provides a clearer strategy for the two struggling segments of the business: U.S. cereal and the Morningstar brand,” analysts led by Robert Moskow wrote. “However, in our view, these two assets are too small to drive a material ‘unlock’ for valuation, even if they operate more effectively independently.”
Analysts also drew comparisons to past food company spin-offs, as well as the possibility for more separations in the future.
“We look at this transaction as another example of a food company trying to slim down its portfolio to improve its long-term growth rate rather than as a harbinger of spinoffs to come,” Credit Suisse wrote in a note.
“Smucker, Mondelez and General Mills have all announced significant divestitures over the past 12 months as well. That said, investors may wonder whether Campbell Soup will follow this theme and consider splitting their Snacks and Meals division to unlock a higher valuation multiple.”
Credit Suisse maintained its neutral stock rating and $69 price target.
Mondelez announced its $2.9 billion acquisition of Clif Bar & Co. on Monday, which effectively grows its snack-bar business to $1 billion. Mondelez has announced a number of new additions to its snacking business recently, including the purchase of Mexican confectionary business Ricolino for $1.3 billion, and European baked goods company Chipita S.A. for $2 billion. Analyst groups note this is the ninth Mondelez acquisition since 2018.
Kellogg’s stock closed Tuesday up 1.7% and has rallied 5.7% to date in 2022. Mondelez shares are down 8.8% on the year.