K: Repeatable Pattern

This is a classic!


If you were CEO, what would you do?


Your company is dramatically underperforming the peer group, you just reported a disaster quarter, the core business is in a secular decline and there is not a defendable strategy to fix the business.


Yes, buy another company to mask these issues!


The British press has been floating rumors around that United Biscuits intends to go public in the fall or potentially be for sale at a $2.0 billion valuation.  At the time, the potential buyers were Kraft and Campbell’s, & Turkey’s Ulker.  Today, the rumors are that Kellogg may make a $2.0 billion bid for the company.


While anything is possible, it is unlikely that the rumors are true.  However, if they were, we believe it’d make K an even better short than before.


Our summary thoughts:

  1. K has the cash to make a bid.  According to the 10Q filed on 8/4/14 – in February 2014, the company entered into an unsecured five-year credit agreement to replace its existing four-year credit agreement, which would have expired in March 2015.  The new five-year credit agreement allows the company to borrow, on a revolving credit basis, up to $2.0 billion.  This includes the ability to obtain letters of credit in an aggregate stated amount not to exceed $75 million and swingline loans in aggregate principal amount up to $200 million in U.S. dollars and $400 million in Euros.
  2. UB will not solve the company’s problems in the U.S.  The acquisition will only distract management from fixing the core business.
  3. Management’s acquisition track record has been tarnished by the Pringles acquisition.
  4. Given the multiples that food stocks are selling for, we suspect the acquisition would be massively dilutive to K.


As K moves higher on this rumor, the short becomes more appealing.


Howard Penney

Managing Director


Matt Hedrick



Fred Masotta


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