The Kellogg Split

In this podcast, Motley Fool analyst Jason Moser and host Deidre Woollard discuss:

• Why Kellogg is splitting up its business.
• If snacks still have growth potential.
• Monster's ability to become a 100-year brand.

Motley Fool host Ricky Mulvey and sports journalist John Nash analyze newly listed TKO Holdings, the company that runs both WWE and UFC, and address the challenges it may face.

To catch full episodes of all The Motley Fool's free podcasts, check out our podcast center. To get started investing, check out our quick-start guide to investing in stocks. A full transcript follows the video.

This video was recorded on Sept. 18, 2023

Deidre Woollard: Has Tony the Tiger lost his charm? Motley Fool Money starts now. Welcome to Motley Fool Money. I'm Deidre Woollard here with Motley Fool analyst Jason Moser. It's another food-centered Monday. Welcome, Jason.

Jason Moser: Hey, Deidre. How are you?

Deidre Woollard: I'd love to talk food with you. We covered some interesting food-related mergers recently. Last week we had Hostess and Smuckers. We're going in a different and yet related direction today and talk about a split between Kellogg's and itself.  This has been in the works for a while, but we have an official date on October 2nd. It's splitting into two independently traded companies, Kellanova and WK Kellogg. Now this is interesting because Kellanova sounds like it's the new thing, but it's actually going to keep trading under the existing ticker K, which is such a great ticker. WK Kellogg is going to take the cereal brands into a separate company, so does that take the emphasis away from the world of cereal?

Jason Moser: I don't think so. When you look at cereal, it's a $10.5 billion industry here domestically. That's according to the data provided by Nielsen. It's still the number 1 breakfast food choice for kids and number 2 for adults. It's terribly convenient. Some of it may be better for you than others, but I think, for me, you start to see the power of cereal. I know that sounds funny to say, but the fact of the matter is, clearly it's something that consumers keep in their pantry at, I think, virtually all times. In wondering why they put cereal on its own, I think, ultimately, this really just gives them a chance to focus on that one particular strategy when it comes to cereal versus the rest of the business, which is more snack-centric. If you look at the portfolio of brands that Kellogg has in total, it's impressive, but cereal is really only just one part of that. This really gives them, I think, the opportunity to focus on the strategies for snacks and the strategies for cereal.

Deidre Woollard: It's interesting because you have companies like Kraft Heinz. They're just like a whole conglomeration of brands, similar with PepsiCo, with all of the Frito-Lay stuff. I want to talk a little bit about Kellanova. They're keeping the international cereal business in that, and I thought that was interesting. You've got the current CEO of Kellogg's. He's staying on as the Chairman of Kellanova. He sees a lot of growth in snacks and also in noodles. Apparently noodles are a very big business across the world. What does this mean? Should we think of the Kellanova part as a like exciting, emerging brand?

Jason Moser: Yeah, I think that's safe to say. We certainly like our snacks here domestically, but that I think really is all around the world. It's safe to say there probably is some saturation here to an extent. But I think when you pan out, you look at the global opportunity, that's what leads them to believe this is the right move. Again looking at this growth strategy, you look at the Kellanova side of the business, this is where they really see the growth potential. It is certainly a more growth-oriented portfolio. Just over the last three years, they've grown revenue on this side of the business at a 9% annualized rate, which is pretty impressive for the food business. Ultimately, going back to the snacks, snacks represent 60% of the overall business anyway, so again I think they see this Kellanova side of the business as really the opportunity to shine a light on the growth potential. The food business, it's not an industry really known for these robust growth numbers, so I think this gives them the opportunity really to shine a light on the growth potential on the Kellanova side.

Deidre Woollard: One of the things I found was interesting is that 50% of that business comes from five brands: Pringles, Cheez-Its, Rice Krispies Treats, Pop-Tarts, and Eggo. [laughs] I don't know why Rice Krispies Treats though didn't get to stay with WK Kellogg.

Jason Moser: Those things are delightful. I love them. Look at what they've done with the Pringles business. You wouldn't even really think about this, but they acquired Pringles back in 2012. They've doubled that business since they acquired it. Again it just goes to show you the power of having that portfolio of those different brands and, really, the global distribution because I can tell you, just having traveled around the world, Pringles are a very popular item pretty much everywhere you go.

Deidre Woollard: There is a comfort in seeing Pringles in a strange place. Let's switch over and talk about the Kellogg side. On this side, you've got Gary Pilnick. He's a longtime veteran of Kellogg. He's going to be the CEO of their WK Kellogg. Now they're calling it a 117-year-old start up. I don't know. They've got the legacy brands, nine of the top 20 cereal brands are Kellogg's, and probably the rest are General Mills, but who knows. They do have some younger brands like Kashi and Bear Naked granola. What do you think? Is this really a 117-year-old start-up?

Jason Moser: You have to love the enthusiasm. I think, ultimately, we can joke about it. It is funny to think about, but I think it's really more the mindset than anything else. Creating that mindset that cereal is cereal, but it's all about looking toward the future, and that's what you want in leadership regardless of the company, right? You just don't want leadership that's going to rest on their laurels. How much innovation can you expect in this market? I don't know, probably not a ton. Cereal will likely be quite the same for the rest of our lives. But hey, that's a good thing. Given its popularity, there's something to be said for that. I think, ultimately, I like creating that mindset of looking forward to the future because, as we know, that's really what investing is all about.

Deidre Woollard: I definitely think that there's room for changes. They talked a little bit about moving the brands themselves beyond cereal, and they talked about cereal itself as a snacking opportunity because it seems like, what they're noticing, and I think we've all noticed this, is that we spend less time with the bowl and the milk and more time with the hand in the box. I think there is an opportunity there to move a little bit beyond what we traditionally imagine cereal. But there is a larger question here, which is the health factor. There's been concerns about gluten, there's concerns about sugar so I think the brand itself, maybe there with the Kashi and, especially, with the Bear Naked, they have to evolve a little bit beyond the beloved brands that we think of as childhood favorites.

Jason Moser: There's no question about it. I think that's ultimately part of it and really being able to focus on the cereal portfolio, for example. It's just being able to ultimately deliver what people want. It's such a wide world of assortments there, and some focus may be on the health side of things more than others, and so you want to be able to just ultimately scratch every itch there, and that's why I think this ultimately gives them the opportunity to do.

Deidre Woollard: If you had the opportunity to invest in either one, are you going Kellanova or WK Kellogg, if you could only choose one?

Jason Moser: I love cereal, don't get me wrong, but I think the growth prospects of Kellanova are a little bit more attractive to me. I think most of that really is, you think about the opportunity in snacks, and I've got a salt tooth probably more than sweet tooth. I eat plenty of cereal, but man, the salty snacks for me are where it's at. We've seen, really, companies like Pepsi through the years. Pepsi has benefited so much just from having that snack side of the business, and so given the growth prospects there, I think I'm a little bit more favoring of the Kellanova business.

Deidre Woollard: Do you think there's a comparison here between what Johnson & Johnson did with spinning off their consumer brands into Kenvue recently? It seems similar because you've got legacy businesses. With Johnson & Johnson, you also had some lawsuits and concerns that prompted that, but Kenvue, it's been out like a month, so it's a little bit too soon to speculate on the success of that, but do you think that the mechanics here are similar in how these two companies spin off from each other?

Jason Moser: I think that's fair. You're giving the respective businesses a chance to shine and grow and do their own thing. J&J split up some rather different businesses where Kellogg, maybe there's some more similarities there, but I think, ultimately, the strategy is very similar.

Deidre Woollard: As we wrap up, this had me thinking about food, in general, as an investment, consumer-packaged goods. It's not exactly the most exciting thing for investors. It's a relatively steady thing. You just keep adding more brands, you keep adding more flavors, and then I thought about drinks and how we've seen things like Monster and Celsius. It's become these, pun intended, monster businesses, but they had to do it. But why? I wondered to myself, why? It's so much easier for a drink to become very popular, but a particular snack food or a line of food, in general, doesn't really take off that way.

Jason Moser: It's a good question. I think that, when you consider Monster, I think Monster is unique because it essentially was like a category creator. I don't know if they invented the energy drink, but it's something new beyond soda or coffee or just what we were used to for so long. I think part of the reason why Monster has done so well is because it was starting from ground level. It was a bit of a category creator. Fast forward 10, maybe 20 years, and I'm sure that looks a little bit different than it does today, but clearly, we've seen more entrance into that market. You mentioned Celsius, and so it's clearly a very competitive market. You're starting to see that play out in Monster's performance there. The margin is starting to come down a little bit. Growth is starting to slow a little bit. I think part of it was just that category creator. But there's some other challenges that you deal with in the food space that you don't necessarily deal with in the drink space. One thing that comes to mind, I know that private-label competition exists in the beverage space, but I don't think Monster really suffers or is really threatened by that private label competition that you would see in the food market. I think, you fast forward 10 or 20 years, the market for something like a Monster looks a little bit different, but it goes back to that idea of the category creator.

Deidre Woollard: Interesting. Do you think, looking forward, that Monster, eventually, they get a bunch of brands under it, and they have like a Kellogg's trajectory? In 100 years, is Monster the Kellogg's?

Jason Moser: It's absolutely possible, but it's also possible that another company out there is looking at Monster today and thinking, you know what, we really want to have that dynamic in our portfolio. One of two things is going to happen. Monster is going to need to evolve by either coming up with some new category or new beverage, they're going to need to make some acquisitions, or someone out there is going to see the merits of that business and decide they want it for themselves.

Deidre Woollard: It's interesting to speculate what kind of food could make a new category. We saw that with Beyond Meat and that has not gone well so far.

Jason Moser: Yeah.

Deidre Woollard: I think you really would need a new category that captured the imagination and people want, and that's a really hard thing to do.

Jason Moser: Yeah, disruption in the food market is pretty difficult. You think of Starbucks and coffee. I'm pretty sure that 100 years from now, people are still going to be drinking coffee, and they're going to be drinking the same way we always have. Now maybe that changes. I don't think either one of us will be around to see that, but I think for the rest of our lives, at least, coffee is gonna be very difficult to disrupt. I think when it comes to beverages, it is fun to think about iteration and evolution and such in the food and beverage market. It's a lot easier said than done.

Deidre Woollard: Absolutely. Thanks so much for your time today, Jason.

Jason Moser: Thank you.

Deidre Woollard: The bell has been rung, and TKO Holdings, a new company built from WWE and UFC, is now battling on the New York Stock Exchange. Ricky Mulvey and combat sports journalist John Nash break down what happens next and a lawsuit that could be a body blow for the company. 

Ricky Mulvey: It is a strange time for combat sports observers. Sean Strickland is your UFC Middleweight Champion, and the UFC and the WWE are now one company. Debuting last week is the TKO group. Joining us now is John S. Nash. He's a mixed martial arts journalist, writing for the Bloody Elbow and hosts the Hey Not the Face podcast. Welcome to the show, John.

John Nash: People are probably confused tremendously by the titles of the website, and my podcast. What does that have to do with anything?

Ricky Mulvey: If we're going to talk about the business of combat sports, I think both of those titles probably make sense versus a more traditional financial media outlet, so I'm excited to get your perspective on this. UFC and the WWE have combined in creating one organization. At a surface level, why do you think investors are excited about this new entity?

John Nash: Because both have dominant market power in their fields. Especially casuals, people that are outside the sports, that are in the world of those sports, those are the only two entities they know about in those sports. They have brand name familiarity. They both dominate their market space. WWE has a little bit of competition with the AEW. I'm not a pro-wrestling fan, so I might screw up the pro-wrestling side. But AEW, so they have that. Everybody knows what the WWE is. They've heard it, they've heard kids talk about it, whatever, and UFC is this thing that's growing massively, and they basically own a sport, and I think that's exciting to investors.

Ricky Mulvey: I think the representatives from ONE FC may disagree with you there, John, but I think that one of the most incredible parts of this story is that the control of the WWE has been taken away from Vince McMahon through this new group and by Endeavor in the new group led by Ari Emanuel.

John Nash: Vince McMahon's been put in a key position ahead of everybody in the UFC and WWE, so he oversees both those, reports only to Endeavor, and what's fascinating was, correct me if I'm wrong, but there was basically a mutiny at WWE a while ago. He was going to get expelled as ownership control of the company. He negotiated a thing where he would negotiate the sale of the company, and then he went around and merged the company instead with Endeavor, and they put him in charge. This is straight out of a TV series success. This was classic, I don't know, that Vince McMahon machinery right here to stay in power. I found that, even though he's technically no longer the sole owner-creator, he still has more control than he was in the other trajectory they were taking.

Ricky Mulvey: My understanding is that he stepped back from the public facing role in response to a lot of the accusations, but he wasn't giving up his ownership control, if you will.

John Nash: Yeah.

Ricky Mulvey: But the reason I want to focus on the combat sports side because, as this company went public, a lot of the company's leaders were making the rounds on financial media. There was just this sticking point that I found when TKO President and Chief Operating Officer Mark Shapiro went on CNBC and was in this response to this claim that maybe this Saudi Arabian-backed mixed martial arts league would create these dramatic increase in fighter pay, which I disagree with the premise of the question, but anyway, on the question about fighter pay, Shapiro said, ''First of all, fighter pay has grown at a faster clip than overall UFC revenue, and more to the point, UFC's overall revenue is driven by high margin revenue streams which can absorb anticipated or unanticipated increases in fighter pay while still resulting in margin accretion.''

Ricky Mulvey: You've written extensively about how, through UFC's revenue growth, fighter pay necessarily hasn't grown with it at all. I'm wondering where there might be a difference of opinion here between you and Chief Operating Officer Mark Shapiro.

John Nash: There's currently a lawsuit against UFC, and in disclosure, the UFC revealed documents about the [inaudible] presentation they did when William Morris, WME, which now is Endeavor, bought the company. Their whole plan was we can freeze fighter pay as a percentage of our revenue, so it's not going to increase. In fact looking at the numbers, it seems like it's decreased in recent years. His argument that it has increased fast in revenue, it doesn't line up with what you reported in the antitrust lawsuit. Also in a filing by the defendants, the UFC, they seem to concede that fighter pay has not risen as fast as revenue. Now if you go back to a previous earnings report that they did at a conference call, during that, they pinpointed how they got this number, and that is they went back to 2005 under the previous ownership. In 2005, they picked that year, and they said, since that year, fighter pay has outpaced revenue. 2005 is a very special year because that's the first year after the UFC blew up after the TUF, The Ultimate Fighter show. Revenue skyrocketed. Fighter pay was locked in the previous contract. That was the lowest paying year as a percentage of revenue the UFC ever had. UFC was paying 40% of the revenue to fighters in 2001, 2002, 2003, 24% 2003, and then in 2005, it plummeted down to 9% of revenue. If they would have just used 2004 or 2006, it wouldn't be a true statement, but by starting with 2005, that's the one year you can make that statement, and it ends up being a true statement.

Ricky Mulvey: The thing that's also key about this is that Endeavor had no ownership stake in the company at that time.

John Nash: Yeah, none. They bought it in 2016. If you look at 2016, fighter pay in that year was 22-23%. It actually went up a bit, they had a bump that year, and it looks like we calculated and estimated fighter pay in 2022, actually, was around 13-14%. We can get into the calculations based on what the Zuffa said, the UFC, the reports, but it's obviously gone down since the peak year. It was the first year that Endeavor bought it. As a percentage, as a wage share, they're going to say wage levels have increased, but as a wage share, it's obviously gone down.

Ricky Mulvey: Also it might not be an appropriate comparison because the number of events have skyrocketed since then as well. The level argument might be a little different. I guess I'm going back to the 2005 case. I want to move though. When we talk about fighter pay, the reason it's important for this new company is because it is facing a lawsuit. It's called Le vs Zuffa. UFC fighters claim that the organization used anticompetitive practices to suppress pay and force fighters into restrictive covenants. One example would be using their likeness for free on video games, and the fighters don't get any revenue from that. In one of these suits, the fighters were recently granted class certification after many years that happened in August. Can you explain why this is a big deal for the fighters to get that class certification in this lawsuit?

John Nash: Because when you're doing a class action, one of the major hurdles is getting class certification. If you sue as individuals, you could have all the evidence in the world, and you could win, but the damages are limited because you're doing individual cases. But class cert, this applies to a wide range of fighters, 1200 fighters to be exact, so the damages are greatly increased. On top of that, it's an antitrust case. If it goes to trial and the plaintiffs win, the damages to get tripled, so those vast damages get tripled if they win in a trial, and because it's a class action, the judge can offer remedy, injunctive relief, and basically force changes in the industry so that these damages don't continue in the future. The reason that class certification is, in fact, you're allowed to appeal class certification is, usually, a class certification is a victory. If you get granted class certification and can go ahead as a class action, odds are is the opposing side is going to be forced to settle because almost all cases settle because appeals are rejected. In the Ninth Circuit, they reject 80% of appeals. It's considered such a massive hurdle and the potential damages and stuff are so vast that it's almost often can viewed as basically the decision in the court that this is as important as a trial decision. That's huge, and I think a lot of people are ignoring that. They're not really paying attention. But the next step after that then is now we have to wait and see what happens to appeal.

Ricky Mulvey: Let's say the plaintiffs win a massive settlement. They're arguing about contracts up through 2017. It's getting some attention among the business in MMA media. Contracts have changed since then. Now fighters are in, what is it, a forced arbitration clause, which means they can't take arguments to a jury trial like this. Let's say that the plaintiffs won a massive settlement, would this fundamentally change the business of this new TKO enterprise or is it a big one-time payout and then they can go along their merry way?

John Nash: The current case would be a one-time payout. There are two cases ongoing. There's the Le versus Zuffa from 2010-2017 that covers, and then from 2017 on is another case, Johnson v. Zuffa, which is basically the identical case, but it starts up at a different class period. If we go to trial next year, which is what the judge says he wants, so if the appeal doesn't work, and they go to trial, then the end result of that would be just damages. If they lose the trial, the damages could be vast. Their expert says that they estimate damages from anywhere from 800 million to 1.6 billion. Of course, if you lose, you get trouble. That becomes 2.4 billion to 4.8 billion. No matter what, that's a lot of damages. That's a lot of money, so that's going to hurt a company that has to cover that. But on top of that, you've now set the precedent that they've engaged in antitrust violations. They monopsonized the sport. You can take that into the next case and make you a stronger case. Now as you mentioned, every fighter in the UFC have now signed a waiver, an arbitration agreement saying that you have to go to arbitration and a class action waiver. The plaintiffs are going to contest that, and take it to court and argue that the UFC used their monopsony power to force fighters to sign these, and so the court shouldn't accept them, but if they do, that eliminates a huge amount of plaintiffs, but it doesn't eliminate the injunctive relief part. If they wanted to, they could continue the case forward and go and ask for injunctive relief. They might not get damages for all those fighters that are in waivers, but the court could combine the Le vs Johnson case, and this would be several years down the road, but then say we have to do some sort of injunctive relief. They've already tipped their hat what they're calling for for injunctive relief to plaintiffs. There was a case in boxing in the '60s, late '50s, a monopoly case called the International Boxing Club of New York, and in that case, the court ordered that no contracts could be exclusive for the next five years. In other words, anyone signed with the International Boxing Club of New York could go fight for anybody else and sign contracts with anybody else. In this case, you've seen it that they've asked for contracts to be limited to one or two years maximum, with no extensions possible, which would dramatically change the industry landscape because all the big fighters, if you watch UFC, and you know there's a fight, like Jon Jones and Francis Ngannou was a massive fight inside or outside UFC. Those two guys, Francis Ngannou is outside the UFC right now, but Jon Jones could sit for a year and then say, "Okay, now I'm going to take the highest bidder to go fight Francis Ngannou," and you can see that just across all the top major fights could be made that way, which would drastically increase the amount that fighters are making.

Ricky Mulvey: Final question, this is a nerdy one. I enjoy watching Dana White's Contender Series on ESPN plus, it's basically a tryout competition for the UFC. But John, one thing that consistently bothers me is they always celebrate, this fighter's getting a contract. They never say what is in these contracts though. It's just, "Hey, you get a contract." Do you have any insight into what is actually in these contracts?

John Nash: We all know what's in the contracts. I have several of them. The contender's contract, you get $5,000 to show and $5,000 additional if you win. Then if you get a UFC contract, you're coming in almost always from a contender series on a $10,000 to show, guaranteed, that's your first when you show up for the event and actually have the fight, and then a $10,000 bonus to win, and you're signed, I think, it's a four or five-fight deal. I can't remember the exact number right now, but I think it's four fights in the UFC when you're entering from contenders, and all these other provisions in it that now you also have to sign away your video game rights, all your image rights, your merchandise rights, the UFC gets to do, so you give up a lot.

Ricky Mulvey: Our guest is John S. Nash. He is a mixed martial arts journalist writing for the Bloody Elbow. His podcast is called Hey Not The Face. In his free time, he enjoys debating the legitimacy of credit rating agencies with mixed martial arts pioneer Pat Miletich. John, thank you so much for joining us on Motley Fool Money.

John Nash: Appreciate it, yes, and I won that debate.

Deidre Woollard: As always, people on the program may have interests in the stocks they talk about, and The Motley Fool may have formal recommendations for or against. So don't buy or sell stocks based solely on what you hear. I'm Deidre Woollard. Thanks for listening. We'll see you tomorrow.