On June 21, Kellogg’s (NYSE: K) announced that its Board of Directors had approved plans to separate its North American cereal and plant-based food business segments via tax-free spin-offs, resulting in three independent publicly-listed companies.
While the names for publicly listed entities will be determined at a later date, Kellogg’s confirmed it would spin off its U.S., Canadian, and Caribbean cereal and plant-based business that accounted for 20% of net sales in 2021.
The remaining business will focus on products such as global snacking, international cereal, and noodles — which accounted for 80% of net sales last year. Kellogg’s stated the spin-offs will be complete by the end of 2023.
So, what is a spin-off?
When an existing company divests a part of its business to form a new company, it’s called a spin-off. The spun-off business will have a new name and will gain ownership of the assets, patents, and other intellectual property associated with the segment.
In a spin-off, existing shareholders will be awarded a 100% ownership interest in the form of a stock dividend. Further, shareholders may also be offered a discount to exchange shares of the parent company with shares of the new entity. For instance, shareholders may be eligible to exchange $50 worth of stock of the parent company for shares worth $55 of the spun-off company.
A spin-off may occur for various reasons and is also known as a “starburst” or a “spinout”. Over the years, companies have undertaken spin-offs to focus on businesses with robust long-term prospects. Additionally, the management team may also focus on streamlining operations and lower cost structures which means a company will spin off loss-making businesses or those with lower profit margins.
Ideally, a spin-off should create value for all the stakeholders involved. Kellogg’s emphasized it will generate a stable stream of revenue and improve profit margins as a stand-alone company in the next few years. According to Kellogg’s, the three companies will be able to better focus on strategic priorities, enabling efficient allocation of capital and resources.
Writer at MyWallSt
Aditya took an interest in the stock market during the financial crash of 2008-09. His favorite stocks include Roku and Apple as both companies enjoy a leadership position in their respective verticals and are poised to beat the broader markets consistently going forward.