Pringles Is An Attractive Acquisition For Kellogg

| About: Kellogg Company (K)

Kellogg (NYSE:K) announced it will acquire the Pringles business from Procter & Gamble for $2.7bn in cash. Procter & Gamble claimed significant interest in Pringles from a number of suitors. Currently, many multinational food companies are refocusing their strategies and even restructuring their organizations in order to build a strong portfolio of snack products.

Kellogg can be considered a surprise buyer of Pringles' global snack assets, given its current very minor presence in the sweet and savory snacks category, generating retail value sales of $58 million in 2010 compared to the company's global packaged food sales of $16.4 billion.

With the integration of Pringles, Kellogg will assume a distant second ranking in the global sweet and savory market with over a 2% value share, behind PepsiCo with 28%. Pringles' largest regional market is Western Europe, where it generates around 36% of its retail value sales, followed by North America (34%). The brand's largest emerging market is Asia Pacific (17%). Although both Pringles' and Kellogg's largest market in Asia Pacific is Japan, Pringles will be a welcome boost to Kellogg's presence in various smaller markets in the region, such as South Korea, Taiwan and Thailand.

Kellogg's North American vs International Market Sales by Category, 2010ScreenHunter_01 Feb. 22 11.04

Source: Euromonitor International

In terms of international expansion through global scale acquisitions, Kellogg has been a relatively late mover compared to other leading multinational food manufacturers, although it maintained its 0.8% global packaged food value share over the 2006-2010 period, to which Pringles will add 0.1 percentage points from 2012 onwards. A Pringles-scale acquisition outside its core cereal market has been a necessary step for Kellogg, although it has entered a category heavily dominated by PepsiCo (NYSE:PEP). On the positive side, through this acquisition Kellogg will be well positioned to benefit from the dynamic growth expected in sweet and savory snacks in most regional markets, but particularly in Latin America and Asia Pacific.


Pringles is a great fit, helping expand Kellogg's international reach and strengthen its snack business. With Pringles, Kellogg's snack unit will account for 46% of group sales, up from the current 40%, making its business model a more balanced one.

The deal will add 8-10 cents EPS to Kellogg's 2012 earnings (per integration costs). However, costs associated with this transaction would press 2012 EPS down by 11 to 16 cents.

Procter & Gamble (NYSE:PG) agreed to sell Pringles to Diamond Foods last year, but the deal fell apart due to delays caused by a U.S. probe into Diamond's accounting practice. The price Kellogg is going to pay is similar to that negotiated with Diamond Foods.

The acquisition of global scale assets such as Pringles will further diversify Kellogg's international presence outside breakfast cereals. This is a positive step for the company. As Kellogg has announced its intention to become a global cereals and snacks player, the acquisition of further snacks brands will likely be required to enhance its portfolio.

Kellogg will fund the deal with $2 bn new debt, and suspend its share buyback program for two years to maintain its current credit rating.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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