By Savyata Mishra
(Reuters) -Shares of Pringles maker Kellanova surged 18% in early trading on Monday, after a Reuters report said candy giant Mars was exploring a potential buyout of the company.
A deal between family-owned Mars and Kellanova, known for snacks brands such as Rice Krispies Treats and Pop-Tarts, would be one of the biggest ever in the packaged food sector.
"We believe that K's portfolio of popular snack brands will fit well with Mars' and help them expand scale in international markets," TD Cowen analyst Robert Moskow said.
Dealmaking in the packaged food space has picked up since last year, including Campbell Soup (NYSE:CPB)'s $2.33 billion buyout of Rao's pasta sauce owner Sovos Brands and J.M. Smucker's acquisition of Twinkies maker Hostess Brands (NASDAQ:TWNK) for $5.6 billion.
Analysts have said Kellanova's deal with Mars could usher in more consolidation in the sector.
Kellanova shares rose to $74.33 on Monday even as broader U.S. stocks fell on fears of the country tipping into recession.
Chicago-based Kellanova had a market value of about $27 billion, including debt, as of the stock's Friday close.
In its second-quarter results, the company raised its annual organic sales and profit forecasts, owing to steady demand for its largest brand Pringles and effective promotions.
D.A. Davidson analyst Brian Holland expects Kellanova to fetch upwards of $87 per share in a takeout, based on 15 times its projected earnings before interest, taxes, depreciation, and amortization (EBITDA) over the next 12 months.
"Mondelez (NASDAQ:MDLZ) could be seen as another potential acquirer, though we view the implied leverage as a limiting factor," Holland said.
Kellanova made up the global snacking business of Kellogg (NYSE:K), before the packaged food giant spun off its slow-growing North America cereal unit WK Kellogg last October.
Sales growth at U.S. packaged food companies such as Kraft Heinz (NASDAQ:KHC), Mondelez and Hershey have taken a hit as budget-strapped customers save their dollars for essential purchases and hunt for cheaper, private-label alternatives to pricier branded items.
"At times like this when growth slows, balance sheets are relatively clean, and valuations dip, the market leaders in food tend to look more closely at big combinations to drive cost synergies," TD Cowen's Moskow said.
Kellanova's forward price-to-earnings ratio for the next 12 months, a common benchmark for valuing stocks, was 16.50, compared with Hershey's 20.99 and Mondelez's 19.69.