Kellogg’s breakup plans benefit snacks business, add concerns on costs
Mario Tama/Getty Images Entertainment

The separation of the Kellogg Companyâs (NYSE:K) underlying snacks, cereal, and plant-based food businesses should offer a short term boost to shares, according to analysts. However, there are also overlooked concerns that Wall Street is advising cognizance of.
On the positive end, Evercore ISI analyst David Palmer indicated that the separation should place a premium valuation on the fast-growing snacks business that has been underappreciated when mixed in with the slowing cereal business. He surmised that the new business may see a premium closer to that of Mondelez (MDLZ), raising his sum-of-the-parts valuation for Kelloggâs (K) to $78 from his previous target of $72. 
While slower growth is anticipated for the cereal business as compared to snacks, Morgan Stanley analyst Pamela Kaufman advised the separation offers greater flexibility to focus on market share and top line growth. As such, she expected there âmodest low-single-digits upside to the current share priceâ due to greater focus on each segment.
To be sure, there were notable drawbacks cited by both analysts. Namely, Kaufman warned of major âdyssnergiesâ associated with the breakup.
âGiven the three businesses currently share corporate, overhead, and operational costs, we expect some cost dyssynergies stemming from their separation,â he explained. âWhile NA Cereal and Plant Co EBITDA margins reflect allocated corporate/overhead costs, the Global Snacking business is likely to face stranded costs following the transaction, which the company will look to offset initially with a Transaction Services Agreement with the spun out entities as well as trimming down overhead expenses.â
Both analysts rated shares âIn-Lineâ as the spin-off plans continue to progress. Shares of the food company fell just over 1.6% in the first half of Wednesday's trading session, giving back much of the gains made after breakup plans were announced on Tuesday.
Read more analysis on the details of the spinoff.