Company Reports

Heady top-line growth has characterized the mature North America packaged-food space of late on the heels of robust pandemic demand followed by inflation-induced price increases. But some don’t want the party to end. To further enhance its exposure to the snacking aisle, privately held Mars announced its intention to acquire narrow-moat Kellanova in a nearly $36 billion deal (including debt) that is slated to close in the first half of 2025. The acquisition price, at $83.50 per share or 16.4 times trailing 12-month adjusted EBITDA, strikes us as attractive, given it’s a more-than 10% premium to our $75 fair value estimate. As we expect the deal to close, we’re raising our fair value estimate to align with the takeout price.

After untangling its operations in October 2023, Kellanova has centered its strategic playbook largely on the faster-growing global snacking category, which accounts for more than half its sales. The attractiveness of this exposure wasn't lost on privately held Mars (which owns brands such as M&Ms, Twix, and Snickers), as it now intends to bring Kellanova's snacking brands under its umbrella in a nearly $36 billion deal. The combined firm would sit as one of the leading operators in the packaged food space, with $60 billion-$70 billion in annual sales and a portfolio of 17 billion-dollar brands. But despite the opportunity to buoy sales, we note this deal runs in stark contrast to efforts across the industry the past several years to slim down to unlock the benefits of focus. As such, we wouldn’t be surprised if Mars ultimately opted to shed some ancillary brands in time, such as Morningstar Farms.

Heady top-line growth has characterized the mature North America packaged food space of late on the heels of robust pandemic demand followed by inflation-induced price increases. But some don’t want the party to end. To further enhance its exposure to the snacking aisle, privately held Mars announced its intention to acquire narrow-moat Kellanova in a nearly $36 billion deal (including debt) that is slated to close in the first half of 2025. The acquisition price, at $83.50 per share or 16.4 times trailing 12-month adjusted EBITDA, strikes us as attractive, given it’s a more-than 10% premium to our $75 fair value estimate. As we expect the deal to close, we’re raising our intrinsic valuation to align with the takeout price.

According to Reuters, privately held Mars is in talks to acquire narrow-moat Kellanova. The news drove a nearly 20% surge in Kellanova shares on Aug. 5, leaving the stock trading in a range that we’d consider fairly valued. From where we sit, Kellanova could garner 15-16 times forward EBITDA in a potential takeover, which would equate to a valuation around $30 billion, or about $90 per share. However, we aren’t making any changes to our $75 per share fair value estimate based on the report, as a deal is far from imminent.

The market continues to warm to narrow-moat Kellanova’s more focused mix, sending shares up a mid-single-digit percentage following decent second-quarter results. Organic sales popped 4%, as an 8% benefit from higher prices (mostly to counter currency swings in Nigeria) was only modestly offset by a 4% downdraft in volumes. Impressively, this growth hasn’t come at the expense of profitability, as Kellanova boasted a 250-basis-point surge in the adjusted operating margin to 15.7% in the quarter, despite a double-digit increase in brand building investments.

After untangling its operations, Kellanova has centered its strategic playbook almost exclusively on its global snacking portfolio. But we don't think it will abandon its focus on increasing investments in its capabilities and brands while extracting inefficiencies. We think it will continue to judiciously tailor its mix to expand pack size options to extend its distribution at home and abroad. However, management's motivation for the split from the cereal business lacked substance, in our view. The primary driver appeared to be unlocking a higher multiple for the faster-growing snack business now that it's unencumbered by the mature North American cereal brands.

The market cheered narrow-moat Kellanova’s first-quarter results of 5.4% organic sales growth and a 380-basis-point rise in adjusted operating margin to 15.9%, sending the shares up by a high-single-digit percentage intraday. We think this signals that the firm’s advantaged geographic and category reach—30% of sales are from faster-growing emerging markets, and snacking accounts for more than half of sales—is finally getting some rightful acclaim. Even after the rally, we view the stock as attractive, trading at a 15%-20% discount to our intrinsic valuation.

After untangling its operations, Kellanova's strategic playbook now centers almost exclusively on its global snacking portfolio. But we don't think it will abandon its focus on increasing investments in its capabilities and brands while extracting inefficiencies. In this context, we think it will continue to judiciously tailor its mix to expand pack size options to extend its distribution. However, management's motivation for the split lacked substance, in our view; from where we sit the primary driver was unlocking a higher multiple for the faster-growing snack business now that it's unencumbered from the mature North American cereal brands.

Narrow-moat Kellanova’s competitive prowess was on display in its first three months as an independent organization—following the split from no-moat WK Kellogg in October. In the quarter, organic sales jumped 6.9% (as an 8% price increase was only partially offset by a 1% downdraft in volume), while the adjusted gross margin expanded 290 basis points to 33.9% and adjusted operating margin shot up 270 basis points to 12.3% (on the heels of price bumps and culled inefficiencies).

After untangling its operations, Kellanova's strategic playbook now centers almost exclusively on its global snacking portfolio. But we don't think it will abandon its focus on increasing investments in its capabilities and brands while extracting inefficiencies. In this context, we think it will continue to judiciously tailor its mix to expand pack size options to extend its distribution. However, management's motivation for the split lacks substance, in our view; we still see the primary driver as unlocking a higher multiple for the faster-growing snack business now that it's unencumbered from the mature North American cereal brands.

We don’t expect to make any change to our $75 fair value estimate for narrow-moat Kellanova, after the firm disclosed results for its final quarter tied to the North American cereal business. Admittedly, there was a significant amount of noise, but from our vantage point, the firm’s outsize exposure to the attractive snacking realm (about 60% of its product mix) and faster-growing emerging markets (which account for about 30% of sales), buttressed by investments in innovation and marketing support, should buoy profitable growth over time. As such, we aren’t wavering on our longer-term outlook, calling for around 3% average annual sales growth and operating margins that approach 17% by fiscal 2032 (up from around 14% in fiscal 2022).

We’re initiating coverage of Kellanova (the standalone global snacking operation of the former Kellogg business) with a $75 fair value estimate and a narrow moat rating. Kellanova possesses a stout portfolio, made up of a host of leading brands. Its top five—Pringles, Cheez-It, Eggo, Pop-Tarts, and Rice Krispies Treats—together account for around 50% of its sales mix.

After untangling its operations, Kellanova's strategic playbook now centers almost exclusively on its global snacking portfolio. We see merit in remaining laser focused on increasing investments in its capabilities and brands while extracting inefficiencies. In this context, we think it will continue to judiciously tailor its mix to expand pack size options to extend its distribution. However, management's motivation for the split lacks substance, in our view; we still see the primary driver as unlocking a higher multiple for the faster-growing snack business now that it's unencumbered from the mature North American cereal brands.

We’re placing Kellogg under review as the firm spins off its North American cereal business, after which it will operate as a pure-play global snacking company under the name Kellanova. Starting Oct. 2, Kellanova will be listed on the New York Stock Exchange under the symbol K, while WK Kellogg will trade under the symbol KLG (both have been listed on a when-issued basis since Sept. 27). We will resume coverage of both share classes upon the commencement of independent trading.

After digesting separate blueprints for Kellogg’s soon-to-be split North American cereal (WK Kellogg) and global snack (Kellanova) arms during investor events on Aug. 9, we plan to maintain our $84 sum-of-the-parts valuation for the combined firm, which is based on respective EBITDA multiples of 9 and 16 times. Further, our wide moat is unchanged for the existing enterprise, reflective of the stout brand portfolio each segment houses.

We don't expect a material change to our $84 sum-of-the-parts valuation for wide-moat Kellogg after digesting solid second-quarter results. Despite sales growth (up 7.1% on an organic basis) and advancing margins (up 130 and 120 basis points, respectively, at the adjusted gross and operating margin lines to 33.7% and 14.9%), the market has yet to be placated, as it awaits further details on the impending split into its global snacking and North American cereal arms. The breakup remains on track to transpire during the fourth quarter, though specifics were deferred to the individual firm's investor days on Aug. 9.

While we've long held Kellogg's strategic playbook (increasing investments in capabilities and brands while extracting inefficiencies) is on point, we question the rationale of its decision to spin off its North American cereal arm, leaving it with its global snacking brands. Despite the increased focus management claims this affords, we fail to see how this strategic action enhances its competitive position or financial prospects, given the reduced scale and added administrative costs that are likely to ensue. In our view, the motivation leans more toward unlocking a higher multiple for the faster-growing snack business once it's unencumbered from its mature North American cereal brands.

Even as wide-moat Kellogg chalked up solid first-quarter results (13.7% organic sales growth, 90 basis points of gross margin improvement to 31.3%, and a 50-basis-point uptick in adjusted operating margin to 13.5%), the market has its eyes on the impending split of Kellogg's global snacking and North American cereal arms (slated to commence by yearend). It appears patience is wearing thin at the lack of disclosures (tentatively scheduled to hit the presses in late summer), evidenced by the 3% downdraft in shares on the print.

While we've long held Kellogg's strategic playbook (increasing investments in capabilities and brands while extracting inefficiencies) is on point, we question the rationale underpinning its decision to spin off its North American cereal and plant-based alternative arms, leaving it with its global snacking brands. Despite the increased focus management claims this affords, we fail to see how this strategic action enhances its competitive position or financial prospects, given the reduced scale and added administrative costs that are likely to ensue. In our view, the motivation leans more toward unlocking a higher multiple for the faster-growing snack business once it's unencumbered by the more mature North American cereal brands.

We view wide-moat Kellogg’s fourth-quarter results as evidence of the enhancements being cultivated by its multiyear agenda to pare back its exposure to noncore brands and categories while investing in brands and capabilities. Organic sales shot up an impressive 16%, buoyed by higher prices (up 15.6%) and increased volumes (0.6%). Further, Kellogg unlocked gains in adjusted gross and operating margins, which rose 120 and 40 basis points, respectively, to 31.4% and 11%. These marks came even as it weathered pronounced cost inflation (qualitatively referenced) and continued to funnel resources prudently to support its brand mix.