In today's ever-evolving consumer-goods landscape, it's hard to overstate the importance of building recognizable brands. But on Monday, Kellogg (K -1.90%) announced a deal to pare its industry leadership in that area, selling a significant slice of its snacking business to global confectionary company Ferrero Group for $1.3 billion in cash.
More specifically, Kellogg will divest brands (and their respective production facilities) including Keebler, Mother's, Murray's, Famous Amos, and cookies manufactured for the Girl Scouts, as well as all of its fruit snacks, pie crusts, and ice-cream cone businesses. Together, this enviable portfolio achieved net sales of almost $900 million last year -- a meaningful chunk of its $13.5 billion in total 2018 sales -- generating an operating profit of $75 million.
This raises the question: Why was Kellogg willing to part with those products in the first place?
Shedding sweets in the name of growth
This shouldn't be surprising to the market considering Kellogg first announced it was exploring the potential sale of these assets last November. The move also followed multiple strategic acquisitions, including Kellogg's $600 million deal to buy health-centric protein-bar maker RXBar in late 2017, as well as its $420 million purchase last May of a stake in Tolaram Africa Foods.
Tolaram is a leading African packaged-foods manufacturer whose products are distributed by Multipro in which Kellogg has owned a 50% stake since late 2015. Collectively, these acquisitions helped drive emerging-market sales to nearly 20% of Kellogg's total last year.
During the company's most recent conference call with analysts in February, Kellogg chairman and CEO Steven Cahillane reiterated the company's strategic direction, stating:
We'll continue to reshape our portfolio in 2019. In West Africa, we'll leverage the competitive advantage that our Multipro distributor gives us, growing our presence in cereal, snacks, and noodles. We will continue to invest in RX's expansion because it gives us a new growth platform that goes beyond the base bars and possibly even beyond the United States. We are also investing in new brands that fill in white space for us such as in the areas of natural foods and digestive health. We are in the process of divesting our cookies, fruit snacks, pie shells and ice cream cones businesses in order to help us focus resources. The outcome of all these actions is a more focused, growth-oriented portfolio.
Sure enough, on Monday, Cahillane added that the formal divestment "wasn't an easy decision," but insisted it will result in "reduced complexity, more targeted investment and better growth."
The bottom line
Kellogg will also leverage its leadership in the North American snacking industry with salty snacks like Cheez-Its and Pringles, cereal brands like Frosted Flakes, Rice Krispies, and Mini-Wheats, and toaster pastries including Eggo and Pop-Tarts.
But if one thing is clear, it's that Kellogg believes this divestment is the best way forward in order to drive sustained, profitable growth over the long term. With shares trading hands near a five-year low as of this writing, that could be exactly the spark it needs for the stock to follow suit.