Kellogg cash strategy to turn toward equity holders in second half of 2009

This article is provided to FT.com readers by dealReporter—a news service focused on providing insightful intelligence on event driven situations to investors. www.dealreporter.com

--------------------------------------------------------------------------------------------------------

Kellogg plans to use its cash to increase shareholder returns after using the proceeds from its recent USD 750m bond offering to reduce the company’s exposure to commercial paper, CEO David Mackay told dealReporter.

The company has USD 650m in authorized share repurchases for 2009, which Mackay said it had pushed to the second half of the year to wait out the market volatility. After trimming down its some USD 1.4bn in commercial paper, it plans to go ahead with previous goals to carry out share buybacks and dividend increases. Kellogg announced at the end of 1Q09 that it would increase the dividend to USD 0.375 in 3Q09 from USD 0.34, after a bump from USD 0.31 in 2Q08.

Market chatter following Kellogg’s indeterminate shelf and May debt issuance surmised that it could be looking to make an acquisition. Mackay said that though Kellogg had the capacity to do a transformative deal of more than USD 1bn, it would continue to look for tuck-in acquisitions to bolster its snack and cereal portfolio domestically and internationally.

“You never say never but a transformational transaction is not our focus,” said Mackay.

The company remains focused on executing their K-lean cost saving initiative, which the company projects will save USD 1bn by 2011. Savings according to Mackay are expected to come from streamlining and automating manufacturing, and a reduction in global indirect procurement costs.

A source familiar with Kellogg said that the May 18 issuance of USD 750m in notes at 180bps over Treasury’s which came the same day the company renewed an indeterminate shelf for debt securities is not part of any pre-established schedule for debt offerings. Kellogg has USD 5bn in total debt that is spaced out in relatively even-sized tranches.

Moody’s analyst Brian Weddington said given that Kellogg’s recent note pricing was more indicative of a higher-rated company, it could look to offer debt with longer tenures than the recent seven-year notes if pricing is still favorable.

How Kellogg will attempt to address USD 1.4bn in 6.6% notes maturing April 2011 remains to be seen. The note would be expensive to tender as it has historically traded well above par, and its majority holders are institutional in nature and therefore count on the high-rated debt to lower their risk profiles.

The company, the source said, has not set a date for another securities offering. Mackay said that he is okay with the company’s leverage and does not feel a need to rush to pay back any more of the company’s debt in an effort to improve its credit rating. Kellogg is not looking to completely wipe out its commercial paper position, but is just seeking to strike a better balance between short and long-term debt, Mackay said.

--------------------------------------------------------------------------------------------------------

For more information or to inquire about a trial please email sales@dealreporter.com or call Europe/EEMEA: +44 (0)20 7059 6160 Americas: +1 212 686-3076 Asia-Pacific: +852 2158 9714