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News > Deals
Kellogg gobbles Keebler
October 26, 2000: 6:26 p.m. ET

Maker of Fudge Shoppe cookies bought for $42 per share or $3.9B
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NEW YORK (CNNfn) - Looking to whet consumers' appetites from the breakfast table through their afternoon snack, Kellogg Co. agreed Thursday to acquire Keebler Foods for approximately $3.9 billion in cash, ending a three-month auction for the No. 2 U.S. cookie and cracker maker.

The merger unites the creators of Tony the Tiger with the Keebler Elves, forming a beefed-up diversified food company boasting more than $10 billion in annual sales. It also provides Kellogg with a much-needed revenue stream in the convenience food category as it struggles to move away from its dependence on U.S. cereal sales.

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graphicKellogg CEO Carlos Gutierrez talks to CNNfn about his company's third-quarter earnings and plans to buy cracker maker Keebler Foods.
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"What we're announcing today is nothing less than a transformation of the Kellogg company," said Carlos Gutierrez, Kellogg's chairman and chief executive. "Keebler is an extremely well-run company with powerful brands and a well-run store-distribution system. We can learn a lot from them."

Kellogg, best known for an expansive breakfast cereal line that includes Rice Krispies, Fruit Loops and Frosted Flakes, said it would pay $42 per share for the maker of Fudge Shoppe cookies and Townhouse crackers, a 6.7 percent premium above the company's closing price of $39.38 Wednesday.

Kellogg will also assume Keebler's long-term debt, bringing the transaction's total enterprise value to $4.4 billion. The company said the transaction would not add to Kellogg's book-value earnings per share until at least 2004, but would be cash-flow accretive immediately and result in $175 million in revenue synergies by 2004.

"The synergies are actually higher than what we thought it would be," said John O'Neil, a food industry analyst with PaineWebber. "The question is: Can they achieve those synergies?"

  graphic THE SCOOP ON KELLOGG  
   
  • Headquarters: Battle Creek, Mich.
  • Employees: 15,051 (12/99)
  • YTD Sales $5.4 billion (9 mths)
  • Market Cap $9.9 bilion
  •    
    Indeed, the merger comes as Kellogg, maker of everything from Pop Tarts to Nutri-Grain cereal bars, struggles to boost sales and fend off investor criticism that it hasn't diversified its product line quickly enough, particularly as General Mills Co. (GIS: Research, Estimates) has chipped away at its once-dominant hold on the U.S. breakfast cereal market in recent years.

    Stiff competition forced the Battle Creek, Mich.-based company to hold down and even slash prices on its hallmark breakfast cereals in recent years; and its acquisition record, which included selling its Lender's Bagels division last year for only 65 percent of what it paid for it in 1996, has been spotty at best.

    graphicThe investor criticism continued Thursday when Battle Creek, Mich.-based Kellogg Co. posted third-quarter earnings in line with expectations, but warned that the slowing U.S. economy and unfavorable currency-exchange translations could cause it to miss analysts' fourth-quarter estimates and limit its 2001 growth rate to the mid-single digits.

    Keebler, which makes everything from Cheez-It crackers to Girl Scout cookies, brings a number of top brands to the table along with a sound financial track record -- having boosted revenue by nearly 20 percent to $2.67 billion and net income by nearly 40 percent to $131.2 million last year.

    graphicPerhaps more important, Keebler brings a well-respected grocery distribution system that Gutierrez said would be tested on a number of Kellogg products as soon as possible. Unlike many food producers, Keebler operates its own fleet of delivery trucks, ensuring its own employees visit grocery outlets at least a couple of times a week and stock the shelves themselves, eliminating delays caused by typical wholesale distribution.

    "We want to grow where consumers are going and we want to follow consumers," Gutierrez told CNNfn. "We know consumers are eating more snacks and more portable food. We want to capture that and what we have needed up to now was a powerful distribution system."

    Investors clearly agreed. After trading down prior to the merger announcement, Kellogg (K: Research, Estimates) rebounded to gain $1.56 to $24.31 Thursday while Keebler (KBL: Research, Estimates) gained $1.06 to $40.44.

    Combined, the two companies will rank as the No. 4 U.S. distributor of vending-machine food. Even more important to company officials, convenience snack foods will make up 40 percent of Kellogg's U.S. revenue stream, while cereal sales will drop from 37 percent to 27 percent.

    graphic"Our reliance on U.S. cereal has been perceived as a negative by the investment community, probably fairly so," Gutierrez said. "Our lack of diversification has limited our investments."

    In a conference call with analysts Thursday, Gutierrez noted Keebler had shown "remarkable" growth for a food company and said its addition to Kellogg's product line would allow the company to begin investing heavily in brand marketing again after months of neglect.

    "We have underinvested in marketing as we have struggled to achieve short-term earnings targets," he said. "It's time to take the renewal of the Kellogg company to the next level. Our current business model makes it difficult to achieve this goal."

    "That's where the execution issues are going to come into play here," O'Neil said. "One of the positives of this team is [Keebler Chairman] Sam Reed and the Keebler management team are going to remain with the company through the transition period."

    Elmhurst, Ill.-based Keebler has been on the selling block since July when its parent company, Flowers Industries, reluctantly put the company up for auction. However, the auction drew fewer bidders than expected, keeping the company from garnering the large premiums obtained by other food companies recently.

      graphic FAST FACTS ON KEEBLER  
       
  • Headquarters: Elmhurst, IL
  • Employees: 11,600 (1/00)
  • YTD Sales $1.48 billion (6 mths)
  • Market Cap $3.7 billion
  •    
    French food conglomerate Danone, a failed bidder for Nabisco considered by many analysts to be Keebler's most logical suitor, dropped out of the process last month, hinting Keebler did not provide enough scale for its worldwide biscuit strategy to warrant a pricey purchase.

    Britain's Cadbury-Schwepps PLC, which also expressed some interest in Nabisco Group Holdings, the No.1 U.S. cookie and cereal concern auctioned off at a healthy 17.3 percent premium in June, likewise has indicated it has no interest.

    That left Kellogg with few competitors for Keebler, allowing it to help keep the cost low, analysts said, noting the cash-starved Flowers Industries was in a difficult position because it had little choice to sell the unit off.

    "I thought the price was very fair," said Erika Grittman Long, an analyst with J.P. Morgan, who follows Kellogg. "We thought anything up through 44 would have been a price that would have diluted the long-term value."

    Separately, Flowers Industries, which owns a 55 percent stake in Keebler, announced Thursday it plans to spin off its remaining operations -- essentially consisting of its Flowers Bakeries and Mrs. Smith Bakeries operations -- to shareholders, in the form of a new company called Flower Foods Inc., trading under its current stock symbol "FLO."

    Flowers Industries (FLO: Research, Estimates) tumbled $2.31 to $16.25 in Thursday trading. graphic

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