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    MARKET EDGES

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Kellogg (K) is currently on our Hedgeye Consumer Staples SHORT bench.

Today K announced a long-term strategic partnership that will significantly expand their presence in Africa. The deal consists of a joint venture in which Kellogg will own a 50% stake in Multi Pro, a premier sales and distribution company and subsidiary of Tolaram Africa. In addition, Kellogg has the right to acquire a stake in Tolaram Africa Foods, which owns 49% of Dufil Prima, a manufacturer and marketer of Indomie noodles, Minimie snacks, Power oil and Power pasta.

DEAL DETAILS

Kellogg has agreed to pay $450mm for a 50% stake in Multi Pro and the option to purchase a stake in Tolaram Africa Foods. Total sales are expected to be approximately $750mm in 2015. The purchase price represents a multiple of the average of 2014’s actuals and 2015’s expected total EBITDA of 15x, and 13x 2015’s expected EBITDA. The final purchase price is dependent on actual results for EBITDA in 2015.

K will fund the acquisition with international cash and an increase in commercial paper of $350mm. K is expecting a neutral impact to EPS in 2015 and 2016 and slight accretion in 2017. The costs associated with the acquisition will lower reported earnings in 3Q15 by approximately $0.01.  

HEDGEYE OPINION

We view this transaction as a great move for Kellogg as it expands their emerging market presence in Africa. But this deal simply is not big enough to make a difference on its own. The true test for K and to turn sentiment more positive will be the resurrection of the U.S. business, which has yet to come to fruition. We are strong believers in the resurgence of the cereal category, and although our thesis that GIS will be a leader in this movement, K will also partially benefit. But for us to turn positive on K it will take a lot more than sequential growth in cereal.

We have a positive outlook on growth prospects in Africa, and expect further M&A action from international food manufacturers such as Nestle, General Mills and Mondelez to take place in the region. South Africa in particular given it is already developed will be a focus for these multinational companies.

Please call or e-mail with any questions.

Howard Penney

Managing Director

Shayne Laidlaw

Analyst