On February 14, 2025, it was reported by multiple sources that Ferrero, the family backed maker of brands such as Nutella, is in the early stages of considering a potential bid for WK Kellogg Co (NYSE: KLG, $19.93, Market Capitalization $1.72 billion) (for more information, visit spinoffresearch.com). Advisers are working with Ferrero to help the confectionary Company decide whether to make an offer for Kellogg, according to the media reports. The discussions are very early, and there’s no guarantee that any bid will be made. Nonetheless, KLG stock popped ~9% on 2/14. While KLG did not comment on the matter at the recent investor conference of Consumer Analyst Group of New York (CAGNY), the Company discussed its own plan for long-term growth through strategic M&A, partnerships, joint ventures and licensing of its brands, hinting at aspirations to expand beyond cereal once its core business is stabilized.
On February 11, 2025, WK Kellogg reported mixed 4Q24 results, beating the consensus EPS but slightly missing the consensus revenue estimate. Net sales in the 4Q and FY24 declined by 1.7% and 2.0% YoY, respectively. This decrease was primarily driven by a 5.6% volume decline in 4Q, partially offset by a 3.8% price realization. The trend aligned with the 1.3% decline in the US cereal category dollar sales as measured by Nielsen AOC. FY24 stand alone adjusted EBITDA grew by 6.6% to $275 million, exceeding the Company’s raised guidance, with a margin of 10.1%, up by 40 bps, driven by improved operational efficiencies. Net income for the year was $72 million, a 34.5% decrease from $110 million in FY23, primarily due to lower sales and increased costs related to supply chain modernization. The Company ended the year with a negative free cash flow of $29 million, resulting from the timing of core working capital. FY24 reported diluted EPS declined by 35.9% to $0.82 from $1.28 in the previous year. However, the adjusted adjusted diluted EPS came in at $1.70 in FY24 versus $1.91 in FY23. Moreover, the Company spent $129 million and $55 million in capital expenditures and dividend payments (3.41% dividend yield) in 2024. As announced on 2/6, WK Kellogg is set to issue a dividend payment of $0.165 per share, up 3% YoY from $0.16, payable on March 14, 2025, at the close of business on February 28.
Valuation and Recommendation
Our fair value estimate for WK Kellogg Co. stands at $23.00 (Previously $18.00) per share based on a 2025e EV/ EBITDA multiple of 8.9x (in line with the FY25 peer median multiple). We upgrade our rating to “Buy” (Previously: ‘Hold’) with an implied upside of 15.4% from the current market price of $19.93 as of 2/26. While the Company reported mixed results, the increase in our target price is due to the news of potential acquisition by Ferrero, (producer of Nutella and other brands), due to which the KLG stock price surged by ~9% on 2/14. Risks to our target price are adverse impacts of currency fluctuation, fall i demand of cereals, recession impacts and fallout of the above-mentioned acquisition/takeover deal.
FY25 Financial Outlook
WK Kellogg laid out its 2025 financial outlook, expecting full-year organic net sales to decline by approximately 1%, with price realization in the low single digits and volume declines in the low single digits. The Company anticipates adjusted EBITDA growth of 4% to 6%, translating to a dollar range of $286 million to $292 million, driven by continued operational discipline and strategic investments. The guidance does not include potential impacts from tariffs on Mexico and Canada, which could pose additional challenges. The Company is undertaking scenario planning to mitigate any potential impacts from these tariffs. WK Kellogg expects to continue its progress toward achieving a 14% adjusted EBITDA margin by 2026, supported by its ongoing supply chain modernization efforts and margin expansion initiatives. This EBITDA growth is expected to be more weighted toward the second half of the year due to shipment timing, the 53rd week, and reinvestments in earlier quarters. In 1Q25, net sales and profits are expected to be affected by the later timing of Easter and the lapping of a large retailer promotion, resulting in an additional headwind of approximately 1.5% to 2.5%. On the development front, KLG plans to continue focusing on innovation and brand development, citing Raisin Bran as a good example. The Company expects to launch Blueberry Bran Crunch and extend its granola platform by launching Bear Naked Oats and Honey in 2025.
Other Updates
• WK Kellogg is nearing the completion of its separation from Kellanova. The Company has transitioned to its independent warehouse network and is creating a scalable IT infrastructure, which will allow it to operate more efficiently as a standalone entity. Additionally, the Company anticipates spending approximately $60 million to exit its transition services agreement with Kellanova and $70 million on base business capital expenditures, representing about 2.5% of net sales. The Company expects to exit all transition services agreements with Kellanova by mid-2025. WK Kellogg also announced a 3% increase in its dividend, a 500 bps YoY increase, showing confidence in the execution of its strategy and its commitment to returning capital to shareholders. The Company remains focused on optimizing cash flow and leveraging its strong balance sheet to fund strategic initiatives, including the modernization of its supply chain and continued investment in innovation and brand building.
• WK Kellogg continues to make significant progress on its strategic priorities, including the modernization of its supply chain and the separation from Kellanova. The Company is investing up to $200 million in its supply chain modernization plan, which includes capital investments in new technology and infrastructure, as well as costs related to network consolidation. The supply chain modernization spend is expected to be more weighted toward the second half of the year due to the timing of construction and other project-related activities.
• WK Kellogg announced the closure of its Omaha, Nebraska plant, with a phased reduction in production beginning in late 2025 and full closure toward the end of 2026. The Company also plans to scale back production at its Memphis, Tennessee facility, resulting in a more focused and streamlined operation. These actions are expected to reduce headcount by approximately 550 employees, with some of these roles being relocated to other facilities where production will increase.
4Q24
In the fourth quarter of 2024, WK Kellogg reported net sales of $640 million, a decrease of 1.7% compared to $651 million in the same period in 2023, impacted by a 5.6% volume decline and a 40 basis point headwind from the weakening Canadian dollar. Despite the decline in sales, operating income increased by 4.8% to $22 million, up from $21 million in 4Q23, resulting in an operating income margin improvement of 20 bps to 3.4%. EBITDA saw a significant decline of 20.8%, dropping to $38 million from $48 million in the previous year, with the EBITDA margin decreasing by 150 bps to 5.9%. Standalone Adjusted EBITDA increased by 7.5% to $57 million, with the margin increasing by 70 bps to 8.9%. Growth in EBITDA was driven by cost discipline and operational efficiency improvements. Net income showed a strong recovery, rising by 26.7% to $19 million from $15 million in 4Q23, driven by improved operational efficiency and cost management. Diluted EPS also improved, increasing by 16.7% to $0.21 from $0.18 in the same quarter of the previous year. Furthermore, standalone adjusted EPS was at 0.42 per share, up by 44.8% YoY.
FY24
For the full-year 2024, WK Kellogg’s net sales were $2,708 million, a 2.0% decrease from $2,763 million in FY23, primarily due to volume declines and foreign exchange headwinds. Operating income saw significant increase of 18.5% to $109 million, with the operating income margin improving by 70 bps to 4.0%, driven by improved supply chain operations and cost efficiencies. EBITDA decreased by 12.7% to $193 million, with the EBITDA margin decreasing by 90 bps to 7.1%. Standalone Adjusted EBITDA increased by 6.6% to $275 million, with a margin of 10.1% (up by 40 bps), driven by improved operational efficiencies. Net income for the year was $72 million, a 34.5% decrease from $110 million in FY23, primarily due to lower sales and increased costs related to supply chain modernization. Diluted EPS also declined by 35.9% to $0.82 from $1.28 in the previous year. These results reflect a mixed performance, with improvements in operating income and margins but declines in net income and EPS, influenced by a challenging operating environment and ongoing investments in supply chain modernization and separation from Kellanova. Furthermore, standalone adjusted EPS was at 1.70 per share, down by 11.0% YoY, due to costs associated with separation from Kellanova.
Valuation
WK Kellogg Co.: Post Spin-Off, WK Kellogg focuses on ready-to-eat cereal in the U.S., Canada, and the Caribbean. For FY25, the Company expects organic net sales growth to be approximately (1.0)%. Adjusted EBITDA is expected to be in the $286-$292 million range. KLG continues to expect a 14% adjusted EBITDA margin by 2026.
EV/EBITDA Valuation: Our fair value estimate for WK Kellogg Co. stands at $23.00 (Previously $18.00) per share based on a 2025e EV/ EBITDA multiple of 8.9x (in line with the FY25 peer median multiple). We estimate a FY25e adjusted EBITDA of $290 million, which is the mid-range of FY25 guidance with net debt and pension liabilities of $619 million. Risks to our target price include a decline in sales resulting in underperformance vs. the current guidance, an increase in costs of raw materials due to supply chain disruptions and a further increase of debt to fund operations.
On February 14, 2025, news reports indicated that Ferrero, family-backed maker of brands such as Nutella, is exploring an acquisition of WK Kellogg. Although the KLG shares are up 49% since it split from Kellanova and ~9% since the potential acquisition news but are still trading at a discount to some of its peers, such as JM Smucker, Post Holdings, and General Mills, making it a potential acquisition target. We have analyzed a few M&A transactions in the North American Foods sector with a deal value of more than $5 billion in the last 10 years (shown in the table below). The median EV/EBITDA multiple of transactions stands at 17.5x, with multiples ranging from 8.1x to 25.1x. Earlier in August 2024, Mars had announced the acquisition of Kellanova for a consideration of $35.9 billion, the total consideration of which represented an acquisition multiple of 16.4x LTM adjusted EBITDA. The transaction is expected to be completed in 1H25.
Sensitivity Analysis
Our assigned multiple of 9.0x is at ~50% discount to the peer median multiple of 17.5x for the M&A transactions in the last ten years. We have performed a sensitivity analysis to assess the impact on our Target Price due to potentially higher EV/EBITDA takeout multiples.
In the above table, if adj. EBITDA changes by ~$10 million, and EV/EBITDA multiple changes by 1.0x, the intrinsic value changes by ~$4.
Company Description
WK Kellogg Co.
WK Kellogg focuses on ready-to-eat cereal in the U.S., Canada, and the Caribbean. It is a cereal leader in the U.S., Canada, and the Caribbean, with beloved brands, a heritage of innovation, and more than a century of operational success. WK Kellogg Co. had estimated FY24 net sales of $2.7 billion. The business focuses on ready-to-eat cereal in the U.S., Canada, and the Caribbean. North America Cereal Co.’s portfolio comprises iconic, world-class brands such as Kellogg’s, Frosted Flakes, Froot Loops, Mini-Wheats, Special K, Raisin Bran, Rice Krispies, Corn Flakes, Kashi and Bear Naked.