Processed Food Stocks: Kellogg's Announces Purchase of Pringles for $2.7 Billion
Pringle's slogan "Once You Pop, The Fun Don't Stop" must have a nice ring to the ears of Kellogg's directors, maybe because they felt it went well with the "Snap, Crackle and Pop" of their Rice Krispies cereal. Either way, the two iconic popping foods are now together under one company.
For $2.7 billion, Kellogg Co. (NYS: K) has agreed to buy the Pringles unit from Procter & Gamble (NYS: PG) . The announcement came on Wednesday, after P&G's previous deal to sell to Diamond Foods fell through in the wake of an accounting scandal, reports CNN Money.
According to P&G, "The Pringles business is an excellent strategic fit for Kellogg, and it will significantly advance their goal of building a global snacks business on par with its global cereal business."
Still, P&G had hoped to gain more from the transaction with Diamond than Kellogg. The deal with Diamond was slated to be worth $2.35 billion and paid out as a tax-free stock transaction, not cash, which will be taxed as a capital gain.
Merger & Acquisitions mentality
Behind this transaction is the question: Why was P&G selling Pringles, and why was Kellogg buying?
When companies buy up or sell other companies or components, they act like individual investors handling stocks. The buyer feels the M&A target is potentially undervalued, or could better thrive under their wing (see: portfolio).
The M&A target may be selling because they feel the company is not efficient enough under their ownership, or even dragging down profits. In the case of Pringles, Kellogg's experience with cereals and snacks could provide a big boost for the potato chip company that P&G wasn't equipped to offer, all while relieving P&G's profit margins.
Business section: Investing ideas
So, Kellogg thinks the snack potato chip company, Pringles, is a potentially undervalued and worthwhile investment. Do you think other snack companies feel the same way?
We ran a screen on processed food stocks that are operating less profitably than their industry averages on the basis of gross, pre-tax, and operating margins.
Do you think the sale of Pringles to Kellogg might inspire these companies to sell off some of their less profitable units to more efficient companies? (Click here to access free, interactive tools to analyze these ideas.)
1. ConAgra Foods (NYS: CAG) : Operates as a food company primarily in North America. TTM gross margin at 23.95% vs. industry average at 32.19%. TTM operating margin at 9.82% vs. industry average at 11.78%. TTM pre-tax margin at 8.81% vs. industry average at 9.3%.
2. Corn Products International (NYS: CPO) : Corn Products International,, together with its subsidiaries, manufactures and sells various ingredients to food and industrial customers in North America, South America, Asia, Africa, and Europe. TTM gross margin at 25.4% vs. industry average at 32.19%. TTM operating margin at 8.93% vs. industry average at 11.78%. TTM pre-tax margin at 9.07% vs. industry average at 9.3%.
3. Treehouse Foods (NYS: THS) : Operates as a food manufacturing company servicing primarily the retail grocery and foodservice distribution channels in the United States and Canada. TTM gross margin at 25.46% vs. industry average at 32.19%. TTM operating margin at 9.58% vs. industry average at 11.78%. TTM pre-tax margin at 6.82% vs. industry average at 9.3%.
4. The Hain Celestial Group (NAS: HAIN) : The Hain Celestial Group,, together with its subsidiaries, manufactures, markets, distributes, and sells natural and organic food, and personal care products in the United States and internationally. TTM gross margin at 29.92% vs. industry average at 32.19%. TTM operating margin at 9.65% vs. industry average at 11.78%. TTM pre-tax margin at 7.94% vs. industry average at 9.3%.
5. Diamond Foods (NAS: DMND) : Engages in processing, marketing, and distributing snack products, as well as culinary, in-shell, and ingredient nuts. TTM gross margin at 29.05% vs. industry average at 32.19%. TTM operating margin at 11.36% vs. industry average at 11.78%. TTM pre-tax margin at 7.16% vs. industry average at 9.3%.
Interactive Chart: Press Play to compare changes in analyst ratings over the last two years for the stocks mentioned above. Analyst ratings sourced from Zacks Investment Research.
Kapitall's Rebecca Lipman does not own any of the shares mentioned above.
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