The American company WK Kellogg has been facing a difficult economic situation for years. Once a staple, sweet cereals are becoming less and less common on breakfast tables. At the same time, fierce competition has emerged over the last decade, both from new alternative players in the premium category—organic brands, etc.—and from private label brands in the low-price category.
In October 2023, MarketScreener pointed out that WK Kellogg's enterprise value of $1.3bn — only 5x to 6x expected operating profit before depreciation and amortization over the next three years — seemed very low. It has since recovered significantly, reaching $2.2bn before Ferrero announced its interest.
WK Kellogg intended to restructure its operations to return to double-digit operating margins, notably thanks to investments in modernizing its production facilities — heavy investments that Kellanova, formerly Kellogg's, did not want to take on, no doubt due to insufficient profitability.
Although its valuation has recovered, WK Kellogg's situation has not improved much in the last eighteen months. Margins have continued to shrink and cash flows have remained under a lot of pressure due to the capital intensity of new investments. Last year, the group distributed a dividend largely financed by additional debt.
However, Ferrero sees beyond these difficulties. The Italian company is a formidable marketing and distribution machine: there are numerous synergies between WK Kellogg's cereals and its own brand portfolio, which would enable it to extend its dominance to new product categories.
For the American group's shareholders, this takeover bid—provided it is approved by the competition authorities—would be the best possible way out in every respect.
