Joanne Cabaero consolidates annual reports and other researches and analyzes the spin-offs of a heritage brand Kellogg.

1. “A 117-YEAR-OLD START UP”
A Case Analysis on Spin-offs of a Heritage Brand
MERGERS, ACQUISITIONS & RESTRUCTURING

2. : From Cereals to Snacking Business
Now, with consumers turning more health-conscious and prefer non-cereal breakfast,
Kellogg must reshape its product portfolio and organizational structure!
Vision: A good and just world where people are not just fed but fulfilled.
Purpose: Creating better days and a place at the table for everyone through our trusted
food brands
Founded in 1906, Kellog’s (NYSE:K) is known as Founded in 1906, Kellog’s (NYSE:K) is
known as world’s leading cereal company, world’s 2nd largest snacking company, a
leading plant-based company, and a leading North American frozen foods company.
It had over 1,000 foods marketed in 180 countries.
Kellogg manufactured in 21 different countries with global operations
in 4 regions: NA, Latin America, Europe, and AMEA.
The primary revenue driver for the company is its North America division,
contributing $2,248 million, which constitutes 58% of the overall revenue amounting
to $3,864 million.
Main shareholders: WK Kellogg Foundation, Endowment Fund (15.68%), The Vanguard
Group Inc (9.05%), BlackRock Inc. (9.01%), Keybank National Association, Asset
Management Arm (6%) = Institutions owning over 50%.
Market Capitalization: $22.7 billion (Aug 2023)
+
CEREALS
SNACKS,
FROZEN
FOOD,
PLANT-BASED
Source: Annual Reports, Investors Relations Presentations

3. Acquires, Partners, and Restructures to Transform
Growing
Portfolio
Expanding in
Emerging Markets
Divesting to Focus
2012
2013
2015 2019
Exiting
from
Direct
Store Delivery
2017
EXIT
Through the JOINT VENTURE with
Tolaram (2015), and Egypt expansion
(2015), Kellogg’s created a significant
African footprint and advanced its
emerging market presence.
With the ACQUISITIONS of Pringles
(2012), Parati (2016), and RXBAR
(2017), Kellogg’s has built presence in
the growing global snacking
category.
Through the DIVESTITURE of the Keebler
business (2019), Kelllogg’s sold selected
cookies, fruit and fruit-flavored snacks,
pie crusts, and ice cream cones
businesses to Ferrero Group at $1.3
billion in cash.
Retained crackers snacks including
Cheez-it.
Source: Annual Reports, Investors Relations Presentations

4. Insights on Previous M&As
Throughout the years, Kellogg has revamped its portfolio to boost performance and enhance long-term shareholder value. This strategic shift is crucial for Kellogg, especially as
consumers in North America and other regions are increasingly opting for non-cereal breakfast options. Consequently, the company recognized the necessity to diversify its portfolio,
leading to acquisitions in high-growth, high-share matrix areas such as Pringles.
Pringles Acquisition: $2.7 billion all-cash transaction
1.
Sold in more than 140 countries and was the world's second-largest supplier of savory snacks
The deal nearly tripled the size of Kellogg's international snacks business.
Generate synergies amounting to $10million and more in 2012 and 2013 respectively and ongoing synergies amounting to $50million to $75 million
Kellogg closed at $52.84, 5.1% increase
*Acquisition as the international power brand -- this becomes the product roadmap blueprint for all other snack brands Kellogg’s carries, which mostly are available in America.
2. Rxbar invigorated its snacks and morning foods portfolio
A segment that has been struggling as Americans turn away from sugary cereals and opt for more health-conscious alternatives
Acquisition cost of clean-label protein bar for $600 million
Sales during the first 12 months of Kellogg’s ownership hit $213 million, a 180% increase over the previous year.
The acquisition helped Kellogg expand further into healthier snack options, which it calls "wholesome snacks."
3. Parati Group is a Brazilian food conglomerate best known for its biscuits, powdered beverages, and pasta.
In 2016, Kellogg acquired Ritmo Investimentos, the Parati Group's controlling shareholder, when Parati had estimated net sales of approximately $190 million.
The deal was Kellogg's largest Latin American acquisition, providing access to a breakfast cereals market less saturated than it is in the U.S.
4. Keebler (with higher P/E than Kellogg’s) was acquired in 2001
Distribution system leverage
Had precise understanding of the business because it had worked closely with Keebler for years before the deal
$170 million in annual cost savings by 2003 through procurement savings, capacity rationalization, improved logistics and warehousing, and the reduction of duplicate
Management strengths, insisting that the Keebler team that was overseeing distribution stay on and run the new business
CONCLUSION: These acquisitions have been drivers towards creating a new core in the business - the global snacking business, highlight the success of Pringles as the international
power brand creating momentum as of today for the company. It is notable that the company had years of strategic acquisitions as well as divestitures before the 2023 major spin-
offs. It is also notable how it used Joint Venture to not fully deep dived in an unknown market before potential full acquisition esp dealing with emerging markets.

5. K highlights cereals in 2018 K rebrands cereals in 2019
When “Sticking to the (Old) Core” doesn’t work anymore
2018 2020-2021
2019
Accelerated consumption growth, led by
snacks and frozen food
Snack portfolio generated 80% of
revenue with Pringles and Cheez-it’s
momentum
Cereal business lagged because of supply
constraints (low inventory levels) due to
2021 fire and strike, which was the single
largest driver of gross profit decline
Highlighted revitalizaing cereal brands -
Raisin Bran and Mini Wheats by
emphasizing wellness attributes
Release of strawberry-flavoured version
of its classic rice krispies and launch of
Special K with 15g protein
New pack formats for shoppability
Revitalizing the Kellogg's masterbrand and
its powerbrands by establishing a cohesive
relationship through a well-balanced
naming and branding hierarchy.
Sustained momentum in snack power
brands
Divested non-core businesses
New pretzel favored Pop-tarts launch
Growth led by snacks in 2021
Source: Annual Reports, Investors Relations Presentations

6. 2019 2020 2021 2022
SALES 13,578 13,770 14,181 15,315
EBITDA 2,073 2,361 2,656 1,893
EBITDA/SALES 15.27% 17.15% 18.73% 12.36%
FREE CASH FLOW 590 1,481 1,148 1,163
DEBT-TO-EQUITY
RATIO
3.08 2.61 2.08 1.82
Financials (2019-2022)
Amounts in millions
Kellogg's has consistently generated earnings
over the years, indicating its stability as a
company but growth has slowed down
looking at max years.
EBITDA/SALES shows significant decline in
2022 to 12.36% from 18.73%
FCF has remain flat in the last three years.
Financials show highly leveraged above 1.5.
Company has a solid track record of dividend
payments, growing at 3.23% per annum. This
attracted loyalty in shareholders.
Market Capitalization: $22.7 B (Aug 2023)
vs Mondelezez $96B
Source: Summarized by author from Annual Reports, Investors Relations Presentations

7. NORTH AMERICA 2018 2019 2020 2021 2022
SNACKS .4% (4.1%) Pandemic 5.5% 11.9%
CEREAL (2.7%) (4.1%) Pandemic (14.4%) 10.2%
FROZEN 7.4% 1.6% Pandemic (3.0%) (1.1)%
Cereals Category is Not Growing
with -2.7% CAGR for Category Volume
Clearly, cereal business became Kellogg’s bad business that required too much effort and time management!
First, cereal within the North American market has reached a mature stage, representing at most, a slow-growth niche, a “structural declining”
category within the consumer staples sector, with -2.7% CAGR.
Second, company-specific problem occured with cereal’s very low production due to fire and strike, resulting in further market share decline to 29%
from 32% in 2019.
*DECLINING CATEGORY + FIRE & STRIKE = DOOM!*
THIS CATEGORY IS WEIGHING DOWN STRONG SNACKING BUSINESS WITH LESS VALUATION COMPARED TO PEERS (MONDELEZ)!
Reported Net Sales Change %
FIRE AND STRIKE BY 1,400 PEOPLE!
Consistent to
Double Digit
Decline Change Rate
Source: Summarized by author from Annual Reports, Investors Relations Presentations

8. When “Sticking to the (Old) Core” doesn’t work anymore
https://www.foodbusinessnews.net/articles/21298-kellogg-snack-sales-growing-rapidly
According to the Stick to the Core or Go for More article, it is
emphasized that organization should focus on its strengths (core)
and what they can do best (Waite, 2002). This way, company can
gain more customers and brand equity in the market. Hence
Advaark has to be cautious in diversifying being still a growing firm
and has not stabilized its core fully. The additional service may be
a big leap for them.
However, for the case of Kellogg, being a leading cereal company,
it is quite unique for it to be spinning its cereal business. This is
because times have changed over 100+ years. Consumer
preferences have changed specially in the breakfast segment
moving towards healthier and on-the-go options.
Hence, we see from here how the legacy brand transformed its
core through adding “more” in the product portfolio and
eventually identifying strategic restructuring to create better
value to shareholders.

9. Announces Separation (2022)
On June 21, 2022, Kellogg announced a three-way split into "Global Snacking Co.," "North
America Cereal Co.," and "Plant Co."
The plan involved spinning off its U.S., Canadian, and Caribbean cereal and plant-based
businesses, comprising around 20% of its 2021 net sales.
The remaining 80% (RemainCo), focused on global snacking, international cereal and noodles,
and North America frozen breakfast, included the intact regions of Europe, Latin America, and
Asia Pacific, Middle East, and Africa (AMEA).
Following the announcement, Kellogg shares surged 10% to $71 each, reflecting a $24.3 billion
market value.
https://www.axios.com/2023/10/03/kellogg-stock-spinoff-kellanova
STEPS TO
COMPLETION
CLOSING
CONDITIONS
Establish independent org
structure
Complete audited FS
Finalize capital structure and
dividend policy
Clearance from tax
authorities and SEC
Other customary approvals
Final approval by BOD

10. As noted by CEO Cahillane, here are the rationale
considerations of separation of companies:
Operate independently
“Focus on distinct strategic priorities with
dedicated financial targets that best fit their own
market and opportunities”
“Execute with increased agility and operational
flexibility, enabling more focused allocation of
capital and resources”
“Shape distinct corporate cultures, rooted in
Kellogg Company’s strong values, and rewarding
career paths”
“Shareholders reap rewards”
Separating to Focus on Distinct Strategic Priorities
Plant Co. (pure play)
$340M in Estimated
Net Annual Sales
$50M EBITDA
North American Cereal Co.
$2.4B in Estimated
Net Annual Sales
$250M EBITDA
Improve Profit Margins
Global Snacking Co.
$11.4B in Estimated
Net Annual Sales
$2B EBITDA
Higher-Growth Company
Accelerate Growth
I concur the need to separate so the company can focus on the new core, the snacking
business. It is notable that the success of past mergers and acquisitions, particularly of
iconic brands like Pringles, have significantly driven momentum and confidence in the
snacking business unit.

11. The global snacks business, which yielded nearly $2 billion in
EBITDA the previous year, is assessed at a comparable 16 times
multiplier as its competitor Mondelez International (MDLZ.O).
This would peg its enterprise value at $32 billion, approximately
$10 billion higher than its current valuation.
The North American division, valued at 11 times EBITDA akin to
U.S. competitor Post Holdings (POST.N), would have an estimated
value of about $3 billion.
The profitable plant-based segment merits a 4 times revenue
multiplier, mirroring the valuation strategy of the less profitable
rival Beyond Meat (BYND.O), suggesting a valuation exceeding $1
billion.
When combining these three, the implied total enterprise value
reaches $36 billion, marking a 20% increase from its pre-
announcement level, without considering yet transaction costs,
market risks, and additional overheads associated with the
transformation of one entity into three.
Source: Reuters
https://www.reuters.com/breakingviews/kelloggs-three-way-breakup-plan-lacks-crunch-2022-06-21/
Valuation: 3 Total Enterprise Value grows 20%
BUSINESS
EBITDA
MULTIPLE
IMPLIED
ENTERPRISE
VALUE
GLOBAL
SNACKS
16x $32B
NORTH
AMERICAN
11x $3B
PLANT-BASED 4x Revenue $1B
While spin-offs may indicate a 20% growth in total enterprise value, it's evident that the
primary winner would be Global Snacks. Despite its high-growth potential, the unit is
constrained by the underperforming cereals segment, leading to a comparatively lower
valuation.
I have reservations about the North American and Plant-based businesses reaching such value,
given reduced economies of scale and the challenges posed by a "structured decline" category.
This meant in investing heavily in innovation to maintain competitiveness in this category,
where Mondelez has taken the lead further in market shares.
The decision to revitalize the cereal business in 2018 and rebrand before the spin-off is
strategic, particularly considering the challenges faced by the North American and Plant-based
businesses. Moreover, we have seen a slow down in Beyond Meat, with stock price at $6.68 vs
high of $234.90, with high inflation making consumers try alternatives.
In light of these factors, a robust dividend policy emerges as a crucial element in fostering
shareholder loyalty amidst market uncertainties.

12. KELLANOVA
(NYSE:K)
K SHAREHOLDERS
GLOBAL SNACKING
WK KELLOG CO.
(NYSE: KLG)
CEREAL BUSINESS
KELLOGG
COMPANY (NYSE:K)
GLOBAL
SNACKING
CEREAL
COMPANY
PLANT BASED
COMPANY
Pre-spin off
Post spin-off (Actual)
A leading
company in the
US, Canada, and
Caribbean.
A leading company
in global snacking,
international cereal
and noodles, and
North America
frozen foods.
Synergies among categories
Unfocused with each category
Speed is slow
Management’s time spread too thin
Reduced risk thru diversification
Agility in decisions and
execution with separate
management and teams
Focused strategy,
operations flexibility
Kellogg decided not to spin off its plant-based foods business and stopped
making its fake meat, which was sold under the equally atrocious brand
name of Incogmeato.
Allocation challenge
Sales force selling all (not focused)
Higher valuation for snacking
Asset perimeter is
regionally focused
Reduced scale
Kellogg brand shared by 2
companies

13. The transaction is intended to result in tax-free distributions of WK Kellogg (Spin
Off) shares to Kellogg Company shareholders, except for cash that shareholders
may receive (if any) instead of fractional shares.
Shareholders would receive shares on a pro-rata basis relative to their Kellogg
holdings at the record date for the spin-off.
Kellanova will retain its place on the benchmark S&P 500 (.SPX) index, while WK
Kellogg Co shares will join the S&P SmallCap 600 index (.SPCY).
Will this be a win-loss spin-off?
The Company also set the distribution ratio of shares at 1 share of WK Kellogg Co
for every 4 shares of current Kellogg Company.
Management promises a “strong aggregate dividend” between the companies.
Leadership: In August 24, 2022, the company had announced Gary Pilnick as CEO-
designate (former vice chair of corporate development and chief legal officer at
Kellogg) and Dave McKinstray as CFO-designate for WK Kellogg (Spin-Off) while
Steven Cahillane will remain as the CEO of Kellanova (RemainCo).
https://www.forbes.com/sites/joecornell/2023/08/02/kellogg-company-to-spin-off-wk-kellogg-in-4q23-files-form-10/?sh=1755495c1a3b
Spin Off Details: Kellogg Separates into 2 Publicly Listed Companies

14. As per Ken Goldman, at JPMorgan, “Whatever Kellogg’s triumvirate of spin-offs gains in operating and financial
focus, it loses in reduced scale, dis-synergies, and the cash cost of the break-up.”
Risks and Challenges Ahead: 1 Wins, 1 Loses?
https://www.ciodive.com/news/kellogg-kellanova-IT-migration/651694/
IT Separation Roadmap
With EY as a migration partner, Kellogg identified Microsoft and SAP as the
two vendors to rely on for major applications and processes.
Change management
Tax considerations
Separated financial statement
$300M in costs
for consulting, advisors, fees and “some capital
expenditure to realign the supply chain to get IT
systems up
Public and Internal communication
Dis-integration execution risk
Employeee and Mgt stock program
Stand-alone operations
Resistance to change by 117 year-old company
CFO finds difficulty separating balance sheet
It must be cohesive and empathetic with people involved, following
previous years strike by 1,400 employees. Similarly, shareholders have to
gain confidence in the rationale.
Reduced economies of scale
This involves multi-countries market and regional manufacturing facilities.
Will it be the same or reduced say for WK Kellogg? This can stir
demotivation during transition.
$35M stand-alone cost $55M overhead cost
for stranded overhead for the global
snacks company
for the North American cereal company
and the plant-based company

15. Disintegrating but Business as Usuals
“ We have to continue to push ourselves so that we’re making bold moves, because
momentum is a precious thing.” - Steve Cahillane, Chairman & CEO Kellogg Co.
https://www.ey.com/en_us/leadership-in-action/kelloggs-painting-the-big-picture
It is notable how Kellogg has been thoughtful in all its actions
before spin-off and after separation announcement. It appears
to be well-defined and well-planned considering structure,
culture, people, customers, investors, and public sentiments.
It is commendable how they partnered with EY to plan and
execute the overall separation.
What is inspiring here as well as challenging is how the CEO
makes sure the momentum of growth (doing business and
strategy as per usuals) while actually undergoing the
separation in terms of structure, processes, and people.

16. It is noted that the Kellogg brand will be
shared by 2 companies = keep the
heritage alive!
Segregating its manufacturing facilities
would be smoother as the assets were
identified separately by region - US vs
Global.
Dis-integrating Global Operations in 4 Regions
Kellogg invited employees from around
the world to submit company name
(PR Newswire)
>Involving the employees allows
building guiding coalition to reduce
resistance to changes!
Plant-based meat brands and Morningstar
Farms as part of Kellanova
>This could pose a challenge, as it involves
anticipating the future landscape with a
supposed strategic focus. Unlike snacks, plant-
based food isn't typically an impulse
purchase, necessitating a distinct set of
operational systems.

17. CONCLUSION
There are acquisitions that will act as drivers towards creating a new core in the business,
highlighting the success of Kellogg’s acquisition of Pringles as the international power brand
creating momentum in the global snacking segment.
It is notable that the company had years of strategic acquisitions as well as divestitures
before the 2023 major spin-offs, which were crucial to its high-growth new core as of today.
It is also notable how Kellogg used Joint Venture to not fully deep dived in an unknown
market before potential full acquisition esp dealing with emerging markets.
More importantly, heritage company needs to change due to economical pressures, new
consumer demands, and undervaluation, necessitating in this case a strategic restructuring.
Spin-offs have to be strategic and dis-integrated well to deliver value. There could be one
winner and another loser for some cases.
Strong leadership is key in creating coalition towards change management. There will be
resistance from employees, investors, and the public.
Spin-offs include structure, culture, process, leadership and people to be successful.

18. REFERENCES
Waite, Thomas J. “Stick to the Core—or Go for More?” Harvard Busienss Review. Harvard Busienss Review,
February 2002.
https://coveringcompanies.journalism.cuny.edu/2022/11/22/ahead-of-kelloggs-split-the-outlook-for-its-cereal-
business-doesnt-look-gr-r-reat/
https://www.axios.com/2023/10/03/kellogg-stock-spinoff-kellanova
https://www.reuters.com/business/kellogg-split-into-three-independent-companies-2022-06-21/
https://www.foodbusinessnews.net/articles/21298-kellogg-snack-sales-growing-rapidly
https://www.sec.gov/Archives/edgar/data/55067/000119312512062261/d300946dex991.htm
https://www.prnewswire.com/news-releases/kellogg-company-board-of-directors-approves-separation-into-two-
companies-kellanova-and-wk-kellogg-co-301922760.html
https://www.forbes.com/sites/joecornell/2023/08/02/kellogg-company-to-spin-off-wk-kellogg-in-4q23-files-
form-10/?sh=1755495c1a3b
https://www.barrons.com/articles/stocks-spin-offs-danger-51652893641
https://money.usnews.com/investing/articles/2016-01-21/corporate-spinoffs-tops-or-topsy-turvy
https://www.ey.com/en_us/leadership-in-action/kelloggs-painting-the-big-picture
https://www.ft.com/content/d9aa1da4-5987-11e1-abf1-00144feabdc0
https://www.bizjournals.com/sanfrancisco/blog/2011/12/diamond-foods-procter-pringles-merger.html
https://www.prnewswire.com/news-releases/kellogg-company-unveils-names-for-global-snacking-and-north-
american-cereal-businesses-following-planned-separation-301773043.html