Ten Questions About a Break Up (K)
Kellogg announced plans to spin off two companies in a tax-free transaction by the end of 2023. There will be three separate companies after the spin-offs including Global Snacking, North American Cereal, and Plant-Based.
Plant-Based Co
What distribution advantages does it lose as a stand-alone? Morningstar certainly received distribution that it would not have received without Kellogg.
How motivated will management be about selling the unit instead of spinning it off? The likely range of multiples on $340M in sales or $50M in EBITDA does not change the math on the breakup transaction.
North American Cereal
In what ways did less resource allocation negatively impact the businesses? A dividend large enough to be attractive will also limit resources.
What will the investment case be after a margin recovery that nearly all CPG companies are targeting? The margin recovery is sizable, but it is more lapping one-time issues plus inflation rather than removing a structural disadvantage.
The dividend will be maintained in the aggregate. How much can North American Cereal carry? The unit is set up to lose its growth opportunities. No growth companies are poor fits for public markets. Five years is a long time to wait for a sale.
Five years after the spin-off what are the odds that it will be competing against the same brands internationally? That would be awkward.
Global Snacking
How will it address holes in its salty snack portfolio? Healthy snacks, protein snacks, and salty snacks are large categories for future growth.
Will it have enough flexibility with its balance sheet to make some key acquisitions early on? At 4x leverage, the North American Cereal Co. would only carry $1B of the $7B of net debt.
Does it have the brands it needs to grow LDD in emerging markets? What acquisitions are needed to bolster future growth?
How does this turbo charge the Global Snack business? Does it accelerate the growth of the business? The plans outlined just remove slow growth and no growth businesses that masked the division’s underlying growth rate. Management should make a stronger case for how it accelerates the underlying growth.
Slower grocery sales in Canada (L.CN)
Retail sales in Canada rose 0.9% in April month over month and 9.2% year over year according to StatCan. General merchandise stores led the growth in April with a 4.2% MoM increase and 19.9% YoY. Food is the top commodity sold in the general merchandise store subsector and typically accounts for one-third of sales. Sales at supermarkets decreased 0.3% in April from March and 0.8% YoY. Sales at beer, wine, and liquor stores decreased 1.6% in April MoM and increased 1.7% YoY. Sales in C-stores decreased 1.0% MoM and 8.0% YoY. StatCan’s early estimate for May is growth of 1.6%. Canada’s high level of COVID-19 restrictions have been a tailwind for the grocery sector. Inflationary pressures and higher food import costs are a headwind for the sector.
Avian flu waning (PPC)
More than 40 million birds in U.S. domestic flocks, mostly chickens and turkeys, have died due to the avian flu. It is the worst outbreak of bird flu since 2014-15 according to the USDA. The virus has killed 6% of the egg-laying hens in the U.S. The outbreak appears to be waning in the U.S. with the recent heatwave as the virus does not survive hot weather. The outbreak has had some varied impacts on poultry and egg prices. Wholesale chicken breast meat prices rose 69% from the beginning of the year to a peak in late May, before a slight pullback recently. Chicken leg and quarter prices have continued to surge while chicken wing prices have decreased to the lowest level in two years. From 2017 to 2021 wing prices averaged 1.65 times breast meat prices. In 2022, wing prices have averaged about half of breast meat prices. Chicken prices have also increased relative to beef prices. The ratio of retail beef prices to retail broiler prices dropped to the lowest level since early 2019. Pork prices have also risen relative to beef prices with the ratio at the lowest level in a year.
