Wall Street loves a growth story, which is why so many companies focus on rapid top- and bottom-line expansion. To achieve this, however, sometimes big changes are needed, like spinning off a business or two.
That's the pitch behind the business split at Kellogg -- which is now Kellanova (K -1.23%) and WK Kellogg (KLG -1.64%) -- and Medtronic (MDT 0.62%), which is looking to jettison two slower-growing businesses. A quick comparison of these two situations is instructive for investors faced with a spin-off in a stock they own.
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Medtronic looks to speed up growth
Medtronic is a large producer of medical devices with a diversified product portfolio. Some are faster growing than others, as you would expect. For the last couple of years, the company has been struggling to get new products approved as it looks to increase its innovation and growth rate.
But it has also been using acquisitions and divestitures to fine-tune its portfolio mix, again with an eye toward more rapid growth. In that regard, it plans to spin off its patient-monitoring and respiratory interventions businesses, which are relatively small contributors to sales and earnings.
The logic here is that patient monitoring and respiratory interventions are slow growth, at best, which drags down the performance of the company's higher-growth divisions.
What's notable is that this is expected to be a very clean break, with little to no overlap with the rest of the company's portfolio. In fact, Medtronic is rumored to be in discussions for an outright sale of these businesses to a private equity firm for as much as $7 billion.
That would likely be an easier and even cleaner break for shareholders, leaving Medtronic with a cash hoard that it could use to invest in research and development or strengthen the balance sheet, among other things.
Kellogg takes a more questionable approach
That compares to the recent split at Kellogg, which spun off its North American cereal business into WK Kellogg and renamed the remaining business Kellanova. The goal, as with Medtronic, was to get out from under its slower-growing businesses so the growth in the rest of this iconic food company's brand portfolio would shine through. That's likely to pan out in time.
But there's a small complication that should have investors thinking twice about an investment in either company. The new WK Kellogg will sell Kellogg branded cereal in North America. This is a mature market where cereal is a stagnant food category, which is why the business ended up on the chopping block. Investors would be justified if they wondered if it is worth owning a business that Kellanova doesn't want to own.
The next problem is that Kellanova will sell Kellogg branded cereal outside of North America. In these markets, there is still growth potential, since cereal isn't as entrenched as a breakfast food in many global markets.
But that creates an odd relationship between Kellanova and WK Kellogg since each company is selling the same brands. What one company does could affect the way customers view the other company's products. Adding to the difficulty, Rice Krispies Treats has a direct link to Rice Krispies cereal. But WK Kellogg doesn't control the Rice Krispies Treats brand even in North America, since it remains with Kellanova.
There are troubling overlaps here that basically meant a spin-off was the only possible way to do what management wanted. That appears to be the removal of just the most troubling markets in the company's broader cereal business. To some, that might look like aggressive financial engineering, which probably isn't a desirable thing to add to a portfolio.
Think through the logic and the plan
Both Medtronic and Kellogg (now Kellanova and WK Kellogg) are trying to achieve the same end: a higher-growth portfolio of products. But Medtronic is removing businesses that really don't fit with the rest of what it owns anymore. That could lead to a more attractive outright sale of the businesses or shareholders getting a spin-off.
Kellogg's breakup, however, has left lingering ties between the two new companies because the split isn't really as clean as the companies would like investors to believe. That's a complication that investors might want to avoid, even if it leaves Kellanova with a faster-growing business.
