Kellogg Buys Pringles - Time For Snacks!

Mar. 02, 2012 5:53 AM ETKellogg Company (K)DMND, PG
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Financial analyst-writer for over 7+ years, featured in financial publications including The Street, Motley Fool and Seeking Alpha. Completed his Bachelor in Business Administration (Finance) with GPA 3.0, completed his LLB (law degree) from one of the premier universities in India. Specializes in analyzing company stocks for the 'long' position, especially in the banking, finance, real estate and technology sector.

On 15th February, Kellogg Company (K) announced its agreement to acquire Proctor & Gamble's (PG) "Pringles" for $2.695 billion. Quite a huge investment, it is supposed to be a great addition to the global snacks business of the company.

Pringles' brand strength and consumer appeal alreadyadd sufficiently to Kellogg's high-quality snacks brands, most notably Keebler, Cheez-It and Special K Cracker Chips, further providing leverage in the international market. Apart from making Kellogg second largest snacks maker after PepsiCo in size, it would also put around 1200 skilled employees at Kellogg's management's disposal.

"We are excited to announce this strategic acquisition," said John Bryant, Kellogg Company's president and chief executive officer. "Pringles has an extensive global footprint that catapults Kellogg to the number two position in the worldwide savory snacks category, helping us achieve our objective of becoming a truly global cereal and snacks company. We are delighted to welcome the employees of the Pringles organization to Kellogg. Their collective passion and commitment has resulted in Pringles' well-deserved acclaim as one of the most recognized brands in the world."

It seems everybody is hopeful about this new deal. The share price of Kellogg Company rose by over 5% on 16th February, and it is the highest since early November, when the company posted disappointing results and curtailed its 2011 financial outlook.

Adding Pringles is expected to increase the global snacks revenue almost equal to that from the cereal department. So adding Pringles will only strengthen the company's sources of revenue.

As Edward Jones analyst, Jack Russo says, it must be noted that the cereal business does face a lot of competition from General Mills and other private label brands.

"It's a win-win," Russo said. "It gets Procter more focused on where they need to be and it's additive to Kellogg's earnings."

And with this new surge of optimism, I would expect that the company will notice some steep rise in its stock price, currently trading at $52.53 on 19 February, 2012, in the future. Good for the investors!

Moreover, in this health-conscious market, with the "100 calorie", "fat free", "multigrain" and many such healthy versions, Pringles definitely has a strong appeal to health watchers as well, which might add few more millions in the revenue.

Who knows if this turn out well, the company might shoot for the world-famous snacks brands of Diamond Foods (DMND) as well? In an interview with Reuters, John Bryant declined to comment on his company's interest in Diamond or any of its brands.

As you already know, due to some accounting glitch, Diamond Foods couldn't take over Pringles and is facing US government litigation at the moment. My common sense says, somebody is going to get Diamond Foods very soon.

And last but not the least, the financial statement matters. How does this "Pringles" deal affect the company's financial statements? Let's look at the company's last quarter financial highlights once.

The company earned total revenue of $3 billion last quarter, up by 6% in the same quarter last year. It's year-over-year sales growth of 4.5% definitely brings a smile to our faces. But what about the operating profit margin? Although its operating profit increased by 20.5% last quarter, the year-over-year graph shows a decrement of (2.9%) in 2011, which is not inspiring at all.

Even gross profit margin seems to have dropped to 41.3% in 2011 from 42.7% in 2010. The gross profit margin in the last quarter, standing at 40.9%, is still lower than 41.6% in the same period of 2010. It can be concluded that although sales are going up, the profit margin is somehow being compromised with. And it seems, the company is mainly hit in the North American and the European region. This new deal just might help to bring back the rhythm in the above mentioned regions once again. After all, Pringles is the fourth-largest brand of snacks in the world, with 2.3 percent of the market. In the United States, it ranks eighth with 2.5 percent.

Moreover, this new deal will fetch the company over $400 million in tax benefits, and might help in increasing the bottom-line of the company. In short, I would say this might turn out to be a nice deal for Kellogg. I am routing for Kellogg this time!

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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