Tony the Tiger and the Keebler Elves are joining forces to create a more diversified food giant with about $10 billion in annual sales.

The Kellogg Co. (NYSE: K) announced Wednesday that it has agreed to buy Keebler Foods Co., the No. 2 U.S. cookie maker. Battle Creek, Mich.-based Kellogg was already the acknowledged front-runner in the bidding for Elmhurst, Ill.-based Keebler, which also makes other snacks.

The transaction with Keebler and Flowers Industries Inc., Keebler's majority shareholder, is valued at more than $3.6 billion, including cash and Keebler's debt, according to The Associated Press.

Kellogg said it will pay $42 for each of Keebler's estimated 86.3 million shares of stock and assume Keebler's debt in a deal expected to close in the first quarter of next year.

Other possible bidders for Keebler once included Groupe Danone of France (with its Dannon Co. in the United States) and Cadbury Schweppes Plc of the United Kingdom (the international soft-drink giant).

But analysts said Kellogg, with nearly $7 billion in annual sales, was the likely buyer with the most need for the acquisition.

Keebler, with about $2.7 billion in annual sales, would reduce Kellogg's dependence on its ready-to-eat cereals. In fact, Kellogg is ranked No. 1 in the world for making and marketing packaged cereals.

Kellogg's announcement also cited the boost to Tony the Tiger's domain: "This portfolio of Kellogg's cereals and convenience foods and Keebler's cookies and crackers will team the popular Keebler Elves and their Hollow Tree with world-famous Kellogg icons such as Tony the Tiger and Snap! Crackle! Pop!"

Claiming the merger would curb operating costs for both companies, Kellogg chairman and chief executive Carlos M. Gutierrez and Keebler chief executive Sam K. Reed said they expect these merger benefits:
  • Diversification of Kellogg's portfolio into faster-growing categories.


  • Substantial sales growth potential for Kellogg's convenience foods through Keebler's direct store delivery (DSD) system.


  • New-product, cross-branding, and license-sharing opportunities.


  • Greater scale in all U.S. product distribution channels, including retailing, club and mass merchandising, foodservice, and vending.


  • Cost synergies from combining two grain-based, brand-based packaged food companies.


  • Greatly expanded opportunities to take advantage of Kellogg's world-class research and development resources.
The Kellogg chief also said the company will continue to grow through more acquisitions as well as boosting its cereal brands and convenience foods, such as toaster pastries, cereal bars, frozen waffles and meat substitutes.

Kellogg has also been mentioned as a strong candidate for buying The Quaker Oats Co.

"We welcome Keebler to the Kellogg family," Gutierrez said in a press release. "Keebler is an extremely well-run company, with strong brands and a powerful DSD system. We can learn a lot from Keebler, and we believe we can strengthen both companies by bringing them together. The result should be better growth for both."

Reed said, "The fit between these two companies is as natural as you can get. We have complementary strengths in Kellogg`s traditional marketing and Keebler`s in-store distribution and merchandising. Just think what our elves can do by bringing Kellogg's brands into our DSD system. We couldn't be more excited about the prospects for this uncommonly good union."

Gutierrez said Reed and David Vermylen, president of Keebler brands, and other key members of the Keebler management team have agreed to become part of Kellogg "going forward."

The deal still faces clearance by federal antitrust regulators, and Kellogg said it plans to finance the acquisition through a combination of short-term and long-term debt.

"We are entering the next phase in the renewal of Kellogg Company," Gutierrez said.

"Combining with Keebler is a significant component of this advancement, but we also need to simplify our current Kellogg business, prioritize its resources, and refuel it with a return to previous levels of marketing investment," he said.

He said Kellogg must focus more resources on its U.S. and other core markets, including the United Kingdom/Republic of Ireland, Mexico, Canada and Australia/New Zealand.

Kellogg's brands include Kellogg's, Special K, Rice Krispies, Eggo, Pop-Tarts, Nutri-Grain, Morningstar Farms and Kashi, and its products are made in 20 countries and marketed in more than 160 countries.

Keebler and its subsidiaries produce such brands as Keebler, Cheez-It, Carr's, Ready Crust, Famous Amos, Murray, Austin and Plantation.

Keebler has previously divested salty-snack operations and sold related assets.

Flowers Industries is one of the leading U.S. bread and snack cake bakers.


by WORTH WREN JR.
StoreAlliance.com