Stock split fever has taken over the stock market. Investors have gravitated to companies that have announced major stock splits, and some of the largest tech giants in the world have gotten in on the action.
Most of the time, stock splits don't have any fundamental impact on a business. Sure, they reduce the cost of a share, letting more investors buy whole shares of the stock. Yet in the end, a traditional stock split just offers a larger number of smaller pieces of the same pie.
However, one company recently announced a different kind of split. Rather than just taking the existing shares and breaking them into smaller parts, this food giant instead decided to split up its company into separate businesses. By doing so, it hopes to create some value for shareholders -- and judging from the initial reaction of investors, it appears to have succeeded.
Snap, crackle, pop!
Earlier this week, Kellogg (K -0.56%) announced that it would make a major restructuring of its overall operations. Rather than continuing as a conglomerate with its combination of very different food segments, Kellogg instead intends to break itself up into three separate businesses, each with its own stock.
Specifically, Kellogg will keep its global snacking business under the umbrella of the original company. With by far the most revenue , the ongoing Kellogg will concentrate on brands like Pringles, Cheez-It, Pop-Tarts, and Nutri-Grain bars. This has also been the most profitable of the businesses for Kellogg. This segment will also keep the fast-growing noodle business in Africa, as well as frozen breakfast products.
Kellogg's North American cereal business will get spun off into a separate company. This will include the company's namesake cereal, as well as Frosted Flakes, Froot Loops, Raisin Bran, Rice Krispies, and the Kashi brand, among others. This unit will operate in the U.S., Canada, and the Caribbean, with other international cereal sales staying with the original Kellogg operation.
Last, Kellogg's efforts in the plant-based foods arena will get spun off into a third entity. The key asset for Kellogg here is its MorningStar Farms brand, which has offered a wide variety of produts in the vegetarian and vegan category. Plant-based foods make up a tiny portion of current sales, but the company does have positive adjusted pre-tax operating earnings, and it's also currently focused on the North American market.
What shareholders will get
With a traditional split, all shareholders receive are additional shares of the same stock. However, Kellogg plans to do what's known as a tax-free spinoff.
In the spinoffs Kellogg is planning, shareholders would receive shares of the two newly separated companies. The number of shares of the new spinoffs that shareholders receive depends on how many shares of the food stock they own as of the record date of the spinoff transaction.
Unlike a traditional stock split, though, it could take a long time for these spinoffs to put shares of the new stocks into the hands of Kellogg shareholders. The food company has to get signoffs from the Internal Revenue Service, as well as going through other regulatory hoops. Kellogg thinks the completion of the spinoffs should happen by the end of 2023, but that 18-month time frame is a lot longer than shareholders usually have to wait for a regular stock split.
After the spinoff, investors will be able to choose which businesses they want to own. Current Kellogg shareholders could just hold onto all of the shares of stock they receive, or they could sell off some of their holdings in order to concentrate on one piece of the old conglomerate.
Unlocking value for shareholders
Shareholders were pleased with the move, sending the stock up 2% the day of the announcement and seeing additional gains during the rest of the week. With so much attention going to traditional stock splits, it's great to see Kellogg taking the extra step to try to figure out how best to split itself up in order to maximize the value of its businesses. Investors should look for more splits like this one.
