Kellogg to Acquire Keebler From Flowers Industries for $3.86 Billion

Food & Drink Weekly, Oct 30, 2000

Ending weeks of speculation, Kellogg Co. plans to acquire Keebler Foods Co. in a deal with Flowers Industries Inc., the majority shareholder of Keebler. Kellogg said it would pay $42 for each of Keebler's shares and assume Keebler's debt under the deal, which is expected to close early 2001. The deal, valued at approximately $3.86 billion, would create a company with almost $10 billion in annual sales and further extend Kellogg's operations beyond the breakfast table and into faster-growing areas of the food business. Keebler Chief Executive Sam Reed will stay on to oversee the integration of Keebler, while David Vermylen, president of Keebler brands, will continue to head up the Keebler operation and run the direct store delivery portion of the business.

Benefits from the merger include: 1) diversification of Kellogg's portfolio into faster-growing categories; 2) substantial sales growth potential for Kellogg's convenience foods through Keebler's direct store delivery system; 3) new product, cross branding and license sharing opportunities; 4) greater scale in all U.S. product distribution channels; and 5) cost savings from combining two grain-based, brand-based packaged food companies.

The acquisition of Keebler is a key part of the company's recently announced growth strategy. Kellogg exec Carlos Gutierrez said that while Kellogg significantly has improved its ability to compete over the past two years, it is now time to seek growth more aggressively. Gutierrez said Kellogg's need to prioritize will result in focusing more resources on the United States and its other core markets -- the UK/Republic of Ireland, Mexico, Canada and Australia/New Zealand. "In the United States, our largest market, we will invest strongly in building our cereal brands, continue to expand our convenience foods business, and enhance our growth through acquisitions," he said.

Following the merger, Kellogg's U.S. cereal business drops from 37 percent of sales to 27 percent, Gutierrez said. "Our reliance on U.S. cereals has been perceived as a negative by the investment community. And this is understandable. A lack of diversification limited our investment opportunities and left us to fight for market share in a category that has not grown," he said. Such convenience snacks, Gutierrez said, represent the fastest-growing category in U.S. supermarkets today and present numerous innovation opportunities. With the merger, 40 percent of Kellogg's sales will come from snacking products in the United States.

The U.S. snack market has reached growing proportions, as Americans continue their love affair with cookies and crackers. According to the Snack Food Association, U.S. consumers ate $19.38 billion of savory snacks (potato and tortilla chips, pretzels, popcorn, and cheese and meat snacks) in 1999, an increase of 6.2 percent since 1998. When sales of cookies, crackers and snack bars are included, sales of snacks in 1999 topped $30 billion, says the group.

Analysts welcomed the much anticipated acquisition, but say the deal has some near and medium-term financial challenges.