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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.
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.
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.
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Editor's Note: What follows below is a small example of the kind of research our loyal subscribers have come to expect and rely upon from Hedgeye over the years. Click here to find a product tailored for you.
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Take a moment to absorb the chart below. It’s something every investor needs to see.
Bottom line is that global population growth is decelerating at its fastest rate since the early to mid 1990’s. Based on historical precedent, another leg down in global growth is likely to follow.
Here’s another huge secular headwind (Demographic Chart) investors need to see.
These two charts are the bull case for long-duration bonds which we have been (successfully) long for some time now. On a related note, the next bull case for stocks is #GrowthSlowing perpetuating the “need” for more Fed cowbell, bailouts, etc.
Unfortunately for the cowbell-inclined, omnipotent, all-knowing central planners across the globe, you can’t CTRL+Print Growth.
Editor's Note: The chart and excerpt below are from this morning's Early Look written by Hedgeye Director of Research, Daryl Jones. Click here for more information on how you can become a subscriber to this daily product designed to keep you a step or two ahead of consensus.
...Well, if you want to be a true contrarian (especially with the Shanghai Composite down -3.5% this morning) it may suggest a re-rating. As highlighted in the Chart of the Day below, China is currently trading at 9.3x next-twelve-months earnings versus 16.1x for the MSCI World Index. A re-rating to the World multiple implies 70%+ upside . . . .
We certainly aren’t suggesting you go run out and buy Chinese equities this morning. But eventually, the time will come again to believe in The Dragon. After all, with Donald Trump emerging as a legitimate candidate for President, we should all be well-practiced at suspending disbelief.
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