Are Friendly Activists Accumulating Kellogg? Unlikely Says Stifel

Are Friendly Activists Accumulating Kellogg? Unlikely Says Stifel

As continued talk of Kellogg Company (NYSE:K) as an activist target is knocked down by a Stifel report to investors today, a friendly activist could emerge that has eyes on short term financial engineering.

Kellogg’s shares up over peers despite “growth challenges”

Shares of Kellogg Company (NYSE:K) have risen 10% over the past two months, bucking a trend in the food group, which was up only 3% over a similar period and 1% up over the S&P 500. This rise in stock price comes amid a drop in sales of 2.4% and a decline in operating profit of 6%.  Unconfirmed speculation centers around a friendly activist accumulating shares along with other funds.

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So why activist interest?

Eyeing advertising spend and reinvestment program

Activists could be eyeing potential financial moves to boost the stock price over the short term.  This could include shifting budget priorities.  For instance, Kellogg Company (NYSE:K) has among the highest level of advertising spending in the food industry, totaling 8% of sales that is garnering attention of bean counting activists.  The goal could be to cut advertising, which would significantly boost short term profits but could have a detrimental impact on the long term brand value.

Activists could also be eyeing cost savings from a recent restructuring program, the financial bounty of which is primarily designed to go back into company re-investment.  The recently instituted Project K, a large-scale, $1.3 billion restructuring program designed to produce roughly $450 million in cost savings that is expected to be used to mostly reinvest back into the business. Instead of long term re-investment, this cash could be used for a share buy-back program or providing this cash to investors could generate short term gains.

Activist talk dampened by Stifel

A recent report from the St. Louis-based brokerage firm Stifel tosses cold water on the Kellogg Company (NYSE:K) buyout rumors, however.  They say takeover speculation typically follows the very weak sales and profit performance.  They do not believe an activist would be successful and that an acquisition would provide “near-term solutions for the company’s growth challenge.”

Specifically Stifel stated in a note dated May 1st 2014 that:

We have fielded many investor calls and emails about our perspective on the stock price increase, and most theories center on the potential for an activist investor engaging the company or a takeover of the business (seems like Heinz/3G/Warren Buffett is the reported buyer of every food asset these days). And, given the higher than average short position, any speculation about an activist investor could have caused some short-covering, further fueling the stock price increase. Speculation of an activist investor or takeover mostly follows the very weak sales and profit performance of the company over the last several years. However, we do not believe an activist would be successful – that is, the company is honed in on the challenging conditions in the cereal category, particularly in the U.S., but this category issue will likely take new product activity and marketing spending to correct the trend and is not expected to be an immediate fix.

Some activist investors are not always concerned about providing structural solutions for growth, but rather financial engineering to enhance trading profits, however.  This leads to Stifel’s more practical point, the control of the board.

Company ownership is currently in solidly friendly hands.  The Kellogg Foundation owns over 20% of the company shares.  A large shareholder and board member owns over 10% of the shares, with management significantly invested in the firm it runs. While the combination of these “friends of Kellogg” is likely below 50%, Stifel notes they we believe the large size of these holdings and control by the board would be sufficient to keep an activist investor at bay.

A friendly activist that works alongside the board with their approval could be treated differently.

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Mark Melin is an alternative investment practitioner whose specialty is recognizing a trading program’s strategy and mapping it to a market environment and performance driver. He provides analysis of managed futures investment performance and commentary regarding related managed futures market environment. A portfolio and industry consultant, he was an adjunct instructor in managed futures at Northwestern University / Chicago and has written or edited three books, including High Performance Managed Futures (Wiley 2010) and The Chicago Board of Trade’s Handbook of Futures and Options (McGraw-Hill 2008). Mark was director of the managed futures division at Alaron Trading until they were acquired by Peregrine Financial Group in 2009, where he was a registered associated person (National Futures Association NFA ID#: 0348336). Mark has also worked as a Commodity Trading Advisor himself, trading a short volatility options portfolio across the yield curve, and was an independent consultant to various broker dealers and futures exchanges, including OneChicago, the single stock futures exchange, and the Chicago Board of Trade. He is also Editor, Opalesque Futures Intelligence and Editor, Opalesque Futures Strategies. - Contact: Mmelin(at)

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