Divestiture Debrief: The Kellogg Split
Tuesday, June 21, 2022
Earlier this morning before the bell, Kellogg announced that it would be splitting itself into three-separate tax-free spinoffs: the slow growing cereal business, a snacking business, and an unnamed plant-based food business mainly consisting of Morningstar Farms. In the press release, the company said splitting these businesses will unlock shareholder value. During the past year, we've seen a number of larger, slower-growing business attempt to divest to grow.
Kellogg itself was unlikely to be sold due to its slowly growing cereal business, such as what Post and General Mills have previously announced. The last time a divesture this important in the package food business occurred, Kraft spun off its snacking business into what is known today as Mondelez. In an unrelated note this morning, Mondelez announced its acquisition of Clif Bar for $2.9 billion. When we take all of these industry movements as a whole, we see that like investors, other companies will chase growth and ultimately acquire these smaller businesses from, while leaving the cereal business behind.
As the supply chain crisis squeezes margins in an already thinly profitable business, divestitures allow for easier optimization strategies, streamlining them through these separate entities. From a management standpoint, these standalone businesses are allowed to grow without interference from its original parent company. Larger companies that have difficulty growing, such as Kellogg have resulted in this strategy as of late. Let's take IBM for example. Last year, IBM spun off its legacy business, otherwise known as Kyndryl, and fully integrated its faster growing acquisition, Red Hat, into IBM's higher growth business. At the end of the day, it's all up to execution of the strategy, and IBM has yet to see much benefit of its faster growth businesses rolled up into it.
At the beginning of the year, Johnson & Johnson announced that they would be spinning its consumer brands business into a separately traded company and the parent would focus on its pharmaceutical business. Larger divestitures such as this can normally take up to 2 years, if not longer. Late last year, GE announced that it would be splitting into three companies as well: healthcare, aviation, and energy. GE never recovered from the 2008 financial crisis, flailing as the once considered iron clad company, quickly fell apart.
The jury is still out on whether the track records will yield results on Kellogg's decision. History has had a mixed bag whether we look at the separation of PayPal from eBay, or Kyndryl from IBM. Divestitures and spin-offs are just one tool for companies who have lagged overall market performance, or that of their peers, but in the end, it's the strategy and execution that must be there to ensure that all entities are stronger apart then they were together.