NEW YORK--Family-owned candy giant Mars is buying Cheez-It maker Kellanova in a nearly $36 billion deal, bringing together brands from M&M's and Snickers to Pringles and Pop-Tarts in the year's biggest deal to date.
Mars said on Wednesday it will pay $83.50 per share for Kellanova, representing about a 33% premium to its closing price on Aug. 2 before Reuters first reported that Mars was exploring a deal for the maker of frozen breakfast foods, such as Morningstar Farms and Eggo.
The deal is a bet on consumers continuing to indulge in branded snacks, and comes as packaged food companies face stalling growth after years of price hikes to cover sky-rocketing inflation. The combined company aims to hold prices steady, said Mars CEO Poul Weihrauch in an interview with Reuters Wednesday, and not pass on costs from the deal to consumers.
"We are a big and stronger company," Weihrauch said. "We hope to be able to absorb more costs in our structure and help alleviate the issues we have in an inflationary environment."
Food prices in the United States increased roughly 25% from 2019 through 2023, far more than other categories such as housing and medical care, according to data from the U.S. Department of Agriculture. But inflation has started to moderate, according to the U.S. consumer price index data released Wednesday.
Consumers in the United States and Europe - major markets for both companies - have been looking for cheaper alternatives or ditching brands for cheaper private label goods. Kellanova has seen private label encroach on its market share for cereal in Europe and other areas, said CEO Steve Cahillane. The company sells sweet cereals such as Smacks, Frosties and Coco Pops in Europe, according to securities filings.
The U.S. packaged food sector is seeing robust dealmaking as companies seek scale to weather the impact of inflation-weary consumers cutting back and shifting their purchases to private label brands. "We think an environment more conducive to deal-making could also encourage some of the large-cap packaged food names within the industry to shift their focus away from portfolio cleanup and divestiture efforts and towards a more offensive, acquisition-led posture with a focus on growth," Barclays analysts wrote in a note on Wednesday.
Investors are also worried about a decline in sales from the greater adoption of drugs such as Ozempic and Wegovy for weight loss, which curb appetites and lead to feelings of fullness. Weihrauch said half of the company's portfolio will be "wholesome" snacks such as low-calorie Special K, Kind bars and Nutri-grain.
Unlike competitor Nestle, Mars has no plans currently to develop new products specifically for people using the weight-loss drugs, Weihrauch said. Mars said it plans bolster its snacking division, invest locally and introduce more healthy options through the deal, as the category is "attractive and durable."
The company has a 4.54% share of the U.S. snacking market, while Kellanova holds about 3.9%, according to data from GlobalData, well behind market leader PepsiCo.
Kellanova sells noodles in Africa, though the business has faced hurdles due to the continent's economic struggles. Cahillane said Kellanova's distribution network in Africa offers Mars an opportunity to take its candy to the continent. Mars' presence in China offers an "enormous" opportunity for Pringles, Cahillane said.
