Kellogg's 3-part spinoff is part of Wall Street trend to 'unlock' fast growth brands
Think about the last thing you ate for breakfast — maybe an energy bar, a protein shake or even a breakfast sandwich that you picked up at fast food drive-through — and you can better understand why Wall Street loves the news of the latest Kellogg spinoff.
When's the last time you poured yourself a bowl of corn flakes? Or spent nearly $5.50 for a "mega size" Kellogg's corn flakes box at 25.2 ounces?
The Battle Creek food giant's spinoff, announced Tuesday, is engineered to unlock the exciting stuff that everyone seems to want to throw in grocery carts these days — the snacks, including the Pop-Tarts and the Cheez-It crackers; and the trendy, such as plant-based MorningStar Farms' spicy black bean burgers and veggie dogs.
Forget the cereal? Some families couldn't care less.
The Kellogg news includes a big win for Chicago, which will gain a corporate headquarters, as some operations shift away from Battle Creek.
The three separate companies will be: "Global Snacking," "North America Cereal," and "Plant Co."
Global Snacking would have its corporate headquarters in Chicago but maintain dual campuses in Battle Creek and Chicago. Kellogg Chairman and CEO Steve Cahillane will be chairman and chief executive officer of Global Snacking Co.
Two spinoffs — North America Cereal Co. and Plant Co. — will both remain headquartered in Battle Creek.
No, they won't be using those unappetizing names. New names will be determined later.
The yet to be named plant company, Kellogg said, would be "a leading, profitable, pure-play plant-based foods company, anchored by the MorningStar Farms brand."
Global Snacking would include, according to the company, "global snacking, international cereal and noodles, and North America frozen breakfast."
The company's news release talked of reshaping the portfolio, significant stand-alone potential and positioning for a new era of innovation and growth.
All are messages, overall, that Wall Street has a taste for these days.
"Spinoffs are traditionally a wealth creator for the shareholder," said David Sowerby, managing director and portfolio manager for Ancora Advisors in Bloomfield Hills.
Kellogg shares were up 3.66% — up $2.47 a share — to trade at $70.01 a share before 11 a.m. Tuesday after the home of Tony the Tiger announced that Kellogg will be split into three independent companies.
Kellogg closed at $68.86 a share — up $1.32 or 1.95% — Tuesday.
The Dow Jones Industrial Average had a strong rebound after some brutal weeks and was up 641.47 points Tuesday or 2.15% to close at 30,530.25 points.
No one can predict, of course, how existing Kellogg shareholders ultimately will do in the months and years ahead. In general, though, Wall Street has looked favorably on shares of the smaller spunkier outfits that emerge out of such spinoffs.
We've seen other spinoffs in the news — including General Electric, IBM and Johnson & Johnson.
GE, for example, announced plans last November to form three public companies focused on health care, aviation and energy.
Sowerby shared data from the Bloomberg U.S. Spin-Off Index that indicated a compound annualized return of 13.47% for the index for 20 years from late 2002 through May — well above the performance for the Standard & Poor's 500 or the Russell 2000 small cap index.
By comparison, the S&P 500 index was up 10.45% and the Russell 2000 index was up 9.9% for the compound annualized return over those 20 years through May, according to the Bloomberg data.
"You're unlocking the faster growing company," Sowerby said. "The list of successful spinoffs is quite robust."
Last summer, for example, Detroit-based DTE Energy completed its spinoff of its non-utility natural gas pipeline, storage and gathering business, called DT Midstream Inc.
DTE shareholders received a distribution of one share of DT Midstream common stock for every two shares of DTE common stock owned on June 18, 2021.
DT Midstream — stock symbol DTM — had a compound annualized growth rate of 24.06% from the spinoff last year through trading Monday afternoon, Sowerby noted.
DTE Energy — stock symbol DTE — had a compound annualized growth rate of 7.48% for the same time.
This year, the stock market hit more than its share of 401(k)-altering speed bumps, particularly in the past few weeks when investors saw steep losses fueled by fears of ongoing skyrocketing inflation and recession worries.
DT Midstream's shares tumbled more than 18% in the past two weeks through June 17 after closing at $59.04 a share on June 7. DT Midstream stock closed at $49.94 on Tuesday, up $1.96 a share or 4.09%.
DTE closed at $134.05 a share on June 7 and fell nearly 13.7% by June 17. DTE closed at $117.14 a share on Tuesday, up $1.42 or 1.23%.
In the Kellogg spinoff, the company said, shareholders would receive shares in the two spinoff entities — cereal and plant — on a pro-rata basis relative to their Kellogg holdings at the record date for each spinoff.
Kellogg management expects that the North America Cereal Co. spinoff may take place ahead of the spinoff for the plant company. But both spinoffs are targeted to be completed by the end of 2023.