Cereal company Kellogg's to split into three separate food businesses

Kellogg's proposed spin-offs will distribute shares to investors in cereal and plant-based companies. Photo / Getty Images

Chief says US group studied past break-ups in its own industry and by other companies such as GEKellogg is splitting into three public companies, keeping its core global snacking business while spinning off the North American cereal brands where the Corn Flakes maker's origins lie and a smaller business selling plant-based foods.

Shares in the US group were up 2.6 per cent by afternoon trading as it laid out plans for the tax-free spin-offs, which come against the backdrop of rising costs and concerns about consumers trading down to cheaper options as food producers increase prices in response.

Steve Cahillane, Kellogg's chair and chief executive, acknowledged that conditions were not easy but told the Financial Times: "We believe the agility and the focus will help the business operate in a tumultuous time."

Cahillane said he had felt no pressure from investors to launch one of the biggest break-ups his industry had seen in recent years, but believed the strategy would "unlock the full potential of our businesses".

The North American cereals business, which generates about US$2.4 billion ($3.8b) in net sales, would no longer have to compete for capital with snack brands such as Pringles and Cheez-It, he added. Those brands would sit in the faster-growing and more profitable global snacking business, which generated about $11.4bn in net sales last year, or around 80 per cent of the group's total revenues.

Cahillane said Kellogg's had studied past break-ups in its own industry and by companies such as GE, which launched a three-way split last year.

Other food businesses have also been trying to narrow their portfolios while struggling to generate organic growth amid changing consumer habits. Unilever last year agreed the €4.5bn sale of its Lipton and Brooke Bond tea brands to CVC Capital Partners, while Kraft Heinz has disposed of brands including Planters peanuts and Cracker Barrel cheese.

Cahillane said the larger company would retain Kellogg's frozen breakfast products in North America, and its cereal and noodles brands in international markets where they lack the scale Kellogg's has in the US, Canada and the Caribbean.

The plant-based group, which generates about $340mn in sales from veggie burgers and similar products, is anchored by the Morningstar Farms brand. Kellogg's would consider potential acquisitions for the unit while pursuing the spin-off, Cahillane said, but he declined to comment on whether it had received expressions of interest.

Consumer Edge Research analysts Jonathan Feeney and Riley McCarten raised their price target for Kellogg's from $70 to $77 per share following the announcement.

The spin-offs should produce "cost savings and greater strategic options" in the future, they said, after a 14-year period of "pricey snack deals, cost cuts, a steadily eroding base of organic gross profit and a roughly flat stock price".

The split could trigger similar deals in the food sector, the analysts added, predicting that Campbell Soup and Kraft Heinz would become "more aggressive to realise value".

The break-up will be achieved by Kellogg's distributing shares to its investors pro-rata relative to their stakes in the parent company. It expects the North American cereal branch to be split off first but is aiming to complete both transactions by the end of next year.

The snacking company will retain the Kellogg's brand, licensing it to the cereal company, Cahillane said. All three companies will keep a presence in Battle Creek, Michigan, its headquarters, but the global snacking business would have its HQ in Chicago.

The group has yet to announce what the three new businesses will be called, but Cahillane added that it would be mindful of a history that began with WK Kellogg creating Corn Flakes in 1894 and the Battle Creek Toasted Corn Flake Company in 1906.

"That's some of the most important work we have to do: to make sure we do not cut a part from our history," Cahillane said. "You'll see Mr Kellogg and his legacy living in all of these companies."

Written by: Andrew Edgecliffe-Johnson, Ben Glickman and Sarah Provan
© Financial Times