As investors digest Kellogg’s (K) decision to split the food conglomerate into three separate companies, the next question on analysts’ minds is, “Who’s next?”
The big food breakup “is already underway,” Bank of America analyst Bryan Spillane told Yahoo Finance, citing the divestures and acquisitions of consumer giants ranging from Kraft-Heinz (KHC) to General Mills (GIS).
Just last week, Mondelēz (MDLZ) announced an agreement to acquire energy bar maker Clif Bar & Company in a deal worth $2.9 billion. Last year, Hershey’s (HSY) acquired pretzels manufacturer Dot’s Homestyle Pretzels & Pretzels Inc. in a combined purchase of $1.2 billion.
“Portfolio shaping has become a very popular term — meaning both divesting and acquiring businesses,” Spillane explained.
“In that portfolio shaping mindset, whether it’s acquisitions, divestitures, or spins, I do think you’re likely to see this process continuing,” he added.
The pandemic (and subsequent stay-at-home trend) boosted packaged food legacy brands like Conagra (CAG), PepsiCo (PEP), General Mills, Kellogg’s, and Kraft Heinz — fueled by consumers’ increased desire for snacking.
Other eating behavior shifts included the preference for healthier, better-for-you options, leading many companies to reassess their portfolios and make the necessary changes to increase growth.
“There’s a view that if certain businesses and product categories are not winning, or if you don’t have a competitive advantage, or if the category characteristics don’t match the rest of your portfolio, there’s more of an incentive to make this kind of reshaping,” Bank of America’s Spillane said.
He emphasized that the food and beverage industry has become accustomed to these types of overhauls over the years. Since 2010, the sector has completed nearly 3,000 acquisitions (totaling $535 billion in deal value), according to recent data from Dealogic.
Future of big food
In the wake of Kellogg’s three-way split, Spillane highlighted several companies he could see making similar moves.
He noted Constellation Brands (STZ) would benefit from separating its wine division from its beer business given their “very different” growth to cash flow ratios, in addition to splitting off Campbell’s (CPB) snack unit from its canned meals and soups segment.
He also called out Unilever (UL) — the parent company of Ben and Jerry’s, Axe, and Dove, among others — saying Kellogg’s split should “revive” conversations surrounding the London-based conglomerate’s “disparate” brands, and whether or not it should split off its food unit.
Unilever significantly underperformed other consumer staples amid the pandemic as it battled rising commodity inflation. Still, analysts were largely in agreement that its extensive and wide-ranging business mix was also to blame.
“Does the step down in profits more than offset the step up that you’re expecting to get in valuation?”Bryan Spillane, Bank of America analyst
One company that Spillane said should not break-up? PepsiCo.
The multinational food, snack, and beverage corporation, which previously avoided a split despite increased pressure from activist investor Nelson Peltz, has “a lot more integration between their beverages and snacks businesses outside the U.S.,” Spillane explained.
Coupled with significant improvements to PepsiCo’s profitability (up 12.9% year-over-year in 2021), the analyst added that a break-up would, not only diminish the company’s international leverage, but would also be too high of a cost to create any real value.
‘Very little detail’ surrounding Kellogg’s split
Spillane told Yahoo Finance that there’s still questions surrounding the standalone profits and costs associated with spinning out Kellogg’s three separate companies.
“They announced this with very little detail,” he said, noting the surprise decision seemed to be “done pretty hastily.”
But Kellogg CEO Steve Cahillane maintained that “it was an extraordinarily weighty decision, to say the least — a 116-year tradition started by Mr. Kellogg.”
The iconic food maker outlined three segments that will venture out on their own to “unleash growth,” as Cahillane told Yahoo Finance Live: (1) Global Snacking Co., which has $11.4 billion in net sales; (2) North America Cereal Co., which has about $2.4 billion in sales; (3) and Plant Co., which has $340 million in sales.
All three businesses are currently profitable, Kellogg noted in a press release.
Spillane cautioned that it’s difficult to determine potential value when recession risks loom large and inflation remains at record highs.
“How much certainty could you have in a ‘value unlock’ plan when you’ve got a market that’s uncertain about how to value things? Is this a time where you want to dilute your focus?” the analyst questioned.
He added that another fundamental question remains — not just for Kellogg’s, but for any company contemplating a split: “Does the step down in profits more than offset the step up that you’re expecting to get in valuation?”
A completion of the reorganization is slated for sometime in 2023.
Alexandra is a Senior Entertainment and Food Reporter at Yahoo Finance. Follow her on Twitter @alliecanal8193 and email her at [email protected]
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