Kellogg's Breakup Looks To Be Too Little, Too Late
Vincent Martin | Jun 29, 2022 17:00
This article was written exclusively for Investing.com
Back in 2019, there was an intriguing bull case for Kellogg (NYSE:K) stock. The stock had been struggling for some time, gaining just 7% total between 2010 and 2018. Total returns including dividends of 40% were less than one-fourth that of the S&P 500.
The problem seemed obvious: Kellogg's business simply wasn't that attractive. conference call about the transaction that each business will be able to better prioritize its resources. The domestic cereal business will focus on cash flow, and Global Snacking on profitable growth. MorningStar will look to expand its market share (though that business could be sold instead).
But there are two big problems here that undercut the idea that the Kellogg breakup is transformative.
Too Late/h2
The first is that the deal simply looks to be too late. While a $10-billion valuation for MorningStar in 2019 might have been excessive — BYND crashed from its highs quickly, though it still ended the year up about 200% from its IPO price — there was an opportunity then to capitalize on investor optimism toward plant-based foods. That optimism is close to gone.
BYND now trades below its IPO price. Even after a long fall, that stock looks shaky: it is in fact one of the most heavily-shorted issues in the entire market.
At its current price, Beyond Meat has a market capitalization of $1.55 billion, a little over 3x revenue. Kellogg disclosed that its plant-based business in 2021 generated sales of $340 million, and EBITDA (earnings before interest, taxes, depreciation and amortization) of $50 million. Sales grew about 9% in 2021.
It's difficult to see that profile garnering much more than a $1 billion valuation: roughly 3x sales and about 20x EBITDA. Again, three years ago it was possible to credibly argue that MorningStar might be worth as much as ten times that amount.
Too Little/h2
The cereal business, too, doesn't look all that valuable. The brands are famous, but the business is not particularly large at this point: it generated $2.4 billion in sales last year, with EBITDA of $250 million.
That, too, is a profile that suggests a relatively modest valuation: something in the range of $2 billion to $3 billion (8-12x EBITDA). Even that may be optimistic: investors are not going to pay up for a business that serves a long-declining category.
Neither valuation really moves the needle against Kellogg's current $24 billion market capitalization. Meanwhile, all three businesses also are going to incur more cost: chief financial officer Amit Banati admitted on the conference call that “on an ongoing basis, there will be some dis-synergies.” In other words, it's more expensive to run the three businesses separately rather than together.
So it's hard to understand the logic here. Investors who own Kellogg now already are owning it for the brands in the Global Snacking business. That's where most of the value is now; given a likely $4 billion or so combined valuation for the spun-off operations, that's where most of the value will be post-split as well.
The breakup, thus, doesn't seem to move the needle. It adds ongoing cost, and no small amount of upfront expense as well. But there's no offsetting value-add, no real argument that Kellogg is worth more broken up, or that its value will suddenly be more apparent to investors.
Indeed, the market mostly has shrugged at Kellogg's plans — and with good reason. The split isn't creating value, and it isn't highlighting value. Not enough has changed.
Disclaimer: As of this writing, Vince Martin has no positions in any securities mentioned.
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