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Kellogg Will Split Into Three Businesses to Overcome “Conglomerate Discount”

Snack and cereal giant Kellogg is about to snap, crackle, and pop into three pieces.

 

The Rice Krispies maker said Tuesday that, by the end of next year, it will split its business into a trifecta of independent companies. One clear money maker, focused on snacks, will emerge.

Frosted Stakes

Kellogg executives were open about being students of other conglomerates Johnson & Johnson and GE, which announced their own breakup plans last year. The reason large companies sometimes do this is to get rid of the conglomerate discount, a term for when markets value them for less than the sum of their parts.

 

"Competition is fierce. Sometimes you have to break it down to build it back up," Liz Young, head of investment strategy at SoFi, told CNN Business. For Kellogg, it’s a chance to shed two lesser performing businesses from its biggest earner:

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Of the three new companies, by far the fastest growing and most profitable will be the global snacking business, which will include Pringles, Cheez-It, and Pop-Tarts alongside North America frozen breakfast brands and international cereal and noodle brands. Collectively, these units earned $11.4 billion in sales in 2021, or 80% of Kellogg’s revenue — Consumer Edge Research analysts said the move could make rivals Campbell Soup and Kraft Heinz “more aggressive to realize value” with their own potential split deals.

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The North American cereals business, which earned $2.4 billion from sales of brands including Froot Loops and Frosted Flakes, would become its own company. Kellogg CEO Steve Cahillanne acknowledged it is ”somewhat declining” since cereal sales have ceded market share to (irony alert) snacks and fast food, but he noted the split means the unit won’t have to compete with the snacks division for capital.

Meat the Parents: Shareholders will get pro-rata stakes of the three new companies and the third firm, a "pure-play plant-based foods company" led by MorningStar Farms with just $340 million in sales last year, may be the least appetizing. Beyond Meat, a major competitor, has failed to make a quarterly profit in almost three years and shares have fallen over 60% in 2022. Kellogg said it may entertain acquisition offers for this business, something shareholders might say sounds “gr-r-reat.”