GIS – THE TRANSFORMATIONAL TRANSACTION

Takeaway: One way an activist can transform this portfolio is to do a Reverse Morris Trust (RMT)

GIS is on the HEDGEYE Best Ideas list as a LONG!

GIS is a great company with strong brands. Its business practices and backward looking are insular. Reshaping the portfolio of brands, CPW and G&A cuts are just some of the ways to create significant shareholder value.

We view GIS as an attractive target for an activist and that the recent performance suggests that management may be too stuck in the past to reshape the company in a way that will accelerate top line growth.  As it stands today, given the current portfolio of brands, it’s unlikely that management will be able to accelerate top line growth without making significant changes to the company. 

As we outlined in our Black Book on GIS, we continue to believe that the opportunity to create significant shareholder value from repositioning the company is significant.  A key tenant to the value creation strategy is a re-shaping of the company’s portfolio, which means selling the brands that management has determined as non-core brands.   

GIS has been rumored to sell off a number of brands, but doing it one by one is inefficient and not tax effective.  We calculate that management has identified roughly $5 billion in sales that are non-core brands that could potentially be sold.

One way an activist can present this possibility is to do a Reverse Morris Trust (RMT) with some of the brands.  All of the brands that we have identified as non-core can fit nicely in a separate company.

The idea is to spin the slow growing low margin businesses into an RMT, leaving the NEW GIS as a company focused on the fast growing parts of the food business – yogurt, snacks and food service.  It will also allow the company to focus on reinventing the core cereal business.

Below is a look into what an RMT is, precedent transactions using this method and a couple diagrams for a visual.

GIS – THE TRANSFORMATIONAL TRANSACTION - RMT Chart 1

GIS – THE TRANSFORMATIONAL TRANSACTION - RMT Chart 2

GIS – THE TRANSFORMATIONAL TRANSACTION - RMT Chart 3

GIS – THE TRANSFORMATIONAL TRANSACTION - RMT CHART 4

Let us know if you have any questions, or would like to discuss in more detail who GIS could partner with in a RMT.

Howard Penney

@HedgeyeHWP