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Kellogg (K) on Track to Optimize Portfolio With Ferrero Deal

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In line with its efforts to reshape portfolio, Kellogg Company K inked a deal to divest certain cookies, pie crusts, fruit and fruit-flavored snacks, and ice cream cones businesses to Ferrero Group and associated firms (Ferrero). The cash deal between the company and the global confectionary provider is worth $1.3 billion (or €1.16 billion as per current exchange rate), which is expected to conclude by July-end.

The proceeds are likely to be solely used in curtailing Kellogg’s debt. Further, the deal is expected to reduce the company’s forecasted bottom line (on a currency-neutral basis) for 2019 by less than 5%. We note that Kellogg shares lost 2.4% following the news. Nonetheless, the divestiture is aimed at enabling the company to increase focus on areas with higher growth potential. On the flip side, the deal is a deemed fit for Ferrero, as it will help the company solidify its presence in North America.  

Details of the Deal

The aforementioned sale represents part of Kellogg’s North American snacking operations, including its cookies business in particular. With this divestiture, the company will offload brands such as Keebler, Murray's Sugar Free, Mother's, Murray's and Famous Amos along with cookies produced for Girl Scouts of the U.S.A. The deal also includes sale of Kellogg’s fruit and fruit-flavored snacks, ice cream cones and pie crusts businesses.

Notably, the contract includes the company’s manufacturing facilities in Augusta, Florence, Louisville, Allyn and Chicago. Together, these ventures generated net sales of about $900 million in 2018 and recorded operating profit of roughly $75 million. However, Kellogg will retain the remaining part of its snacking business, including crackers, salty snacks, toaster pastries and wholesome snacks brands.

Will Efforts Lift the Stock?

Kellogg’s North American business remained challenged in the fourth quarter of 2018, with sales down 2% to $2,043 million. During the quarter, sales declined across the U.S. Snacks, U.S. Morning Foods and U.S. Specialty Channels categories. In fact, the U.S. snacks business has been struggling since 2013 due to weak volumes. Also, Kellogg’s mainstay U.S. cereal business, which forms part of its U.S. Morning Foods business, has been performing poorly since 2012 due to sluggish category growth.

Owing to these headwinds and escalated costs (associated with planned increases in growth investments), this Zacks Rank #4 (Sell) stock has tumbled around 17% in the past six months, wider than the industry’s decline of 4.4%. Nevertheless, we expect Kellogg’s focus on innovation, solid cost-saving initiatives and efforts to revamp business through resource optimization to yield and help uplift investors’ sentiments.  

Don’t Miss These Solid Food Stocks

MEDIFAST MED, with long-term earnings growth rate of 20%, sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

General Mills GIS, with a Zacks Rank #2 (Buy), has long-term earnings per share growth rate of 7.5%.

Sysco Corporation SYY, with long-term earnings per share growth rate of 10.3%, carries a Zacks Rank #2.

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