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Kellogg Closes Pringles Buy from P&G

Zacks Equity Research

Retail giant, The Procter & Gamble Company (PG) recently announced that it has completed the sale of its snacks unit, which included the iconic potato snack Pringles, to the world’s largest cereal maker Kellogg Company (K) for $2.7 billion.

The Pringles workforce as well as the manufacturing plants at Jackson, Tennessee, and Mechelen, Belgium, will now be under the purview of Kellogg. The deal which was first announced in February this year will result in an after-tax gain in the range of $1.4 billion to $1.5 billion (approximately 47 cents to 50 cents per share) for P&G.

With the deal, Kellogg becomes a strong player in the savory snacks business, second only to PepsiCo, Inc. (PEP). Further, we believe the Pringles buyout is likely to reduce Kellogg’s dependence on its mainstay cereal business apart from adding an important brand to its already popular offerings of snacks like Keebler and Cheez-It.

The buyout is expected to strengthen sales in Europe and mark a forceful entry in Asia and Latin America. In North America, the addition is expected to boost revenues by more than $500 million. With the Pringles deal closed, the company is expected to generate more than $15 billion in annual sales and over $6 billion in snacks sales globally. The Pringles deal is expected to dilute Kellogg’s 2012 earnings by 6–11 cents per share.

Our Recommendation

We currently have a Neutral recommendation on both Procter & Gamble and Kellogg. The Kellogg stock carries a Zacks #3 Rank (Hold rating) while P&G carries a Zacks #4 Rank (Sell rating) in the near term.

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