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Kellogg (K) to Add RXBAR, Diversify Organic Product Line

Zacks

In line with the strategy to diversify its organic offerings, Kellogg Company K entered into an agreement to acquire protein bar maker, Chicago Bar Company.

Chicago Bar Company makes RXBAR, which is considered the fastest growing nutrition bar brand in the United States.

Transaction Details

The acquisition, valued at $600 million or $400 million net of tax benefits, is anticipated to close by 2017-end. Chicago Bar Company will operate as an independent business within Kellogg.

RXBAR expects to generate net sales of $120 million in fiscal 2017. Kellogg expects the multiple on projected 2018 EBITDA to be in the 12x-14x range, inclusive of the tax benefits to the purchase price. The acquisition however will not be accretive to earnings in 2017 and 2018, excluding one-time costs.

Buyout Benefits

The addition of “clean-label, high-protein” RXBAR can be expected to revive Kellogg’s wholesome snacks business, which has been weak over the past few quarters. The U.S. snacks business has been struggling since 2013 owing to weak volumes. Though Pringles has been performing well, the deterioration in U.S. snacks is stemming from weakness in weight-management products like Special K bars, Special K cracker chips and Right Bites' 100-calorie cookie packs. In the first six months of 2017, the snacks segment’s net sales dropped 3% year over year.

Kellogg is poised to benefit from RXBAR’s immense brand appeal and strong online presence. RXBAR, on the other hand, will be able to capitalize on Kellogg's scale and resources to accelerate growth.

Kellogg is innovating and diversifying its line of offerings to keep up with changing consumer needs and counter the weak sales trajectory, similar to food giants like General Mills Inc. GIS, Conagra Brands Inc. CAG and The Hershey Company HSY.

Persistently soft sales have led to a 18.4% decline in the company’s shares in the past year. The stock has also been trading below its industry. Current-year estimates for this Zacks Rank #3 (Hold) stock went down 0.3% in the last 30 days but remained stable for next year. Though Kellogg is facing tepid sales, such organic products can be expected to boost demand.



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