Kellog (ticker: K) stock was shooting skyward on Tuesday after the cereal and snack brand announced plans to divide into three separate companies.
Kellog will spin off its U.S, Canadian, and Caribbean cereal and plant-based businesses. The new names of the companies have not been decided and will be released at a later date.
The first of the three will incorporate Kellog’s global snacking, international cereal and noodles, and North American frozen breakfast. Kellog’s estimations place this company at roughly $11.4 billion in net sales from brands including Pringles, Cheez-it and Nutri-Grain. The company will retain its Chief Executive Officer, Steve Cahillane.
The second of the three will encompass the “North America Cereal Co.” with roughly $2.4 billion in net sales, will be cereal mostly targeting the U.S., Canada, and the Caribbean. The company’s short-term goals include restoring inventory and profit margins after the supply disruptions experienced during and after the pandemic. The company management will be announced at a later date.
Finally, the “Plant.Co.” will be a plant-based foods company with its primary market in North America, with an intention to expand internationally. It will have roughly $340 million in net sales facilitated by the MorningStar Farms brand.
“These businesses all have considerable standalone potential, and an enhanced focus should enable them to better direct their resources toward their unique strategic priorities,” Cahillane said. “In turn, each business is expected to create more value for stakeholders, and each is well-positioned to build a new era of innovation and growth.”
One of the key positives is the fact that the spinoffs are all tax-free transactions. The other is for Kellog shareholders who stand the opportunity to receive shares in two spinoff entities, depending on their holdings at the date of each spinoff. It’s expected that the North America Cereal Co. will be spun off first, followed by Plant Co., with the end goal being that both should be completed by the end of 2023.
In recent times, spinoffs have gained increasing popularity as a way for companies to unlock value for investors because, in theory, they allow pieces of a corporation to trade at higher valuations than they typically would if they were trapped inside the company. However, it’s important to note that spinoffs are rarely straightforward, take a long time to execute, and even longer for the spun-off company to make significant returns.
Shares of Kellog gained 8%, landing at $73 in premarket trading on Tuesday.