Cereal giant Kellogg Co. agreed Thursday to buy No. 2 U.S. cookie and cracker maker, Keebler Foods Inc., for about $3.6-billion (U.S.) as it moves away from cereal and expands in the faster-growing snack food business.
Kellogg, based in Battle Creek, Mich. and the maker of Frosted Flakes cereal and Pop-Tarts pastries, said it will pay $42 a share for Keebler and will assume about $800-million in Keebler debt.
Elmhurst, Ill.-based Keebler makes Pecan Sandies shortbread cookies, Town House crackers and Cheez-It crackers.
The combination of Kellogg and Keebler, will team the popular advertising characters of the Keebler Elves and their Hollow Tree with such world-famous Kellogg icons as Tony the Tiger and Snap! Crackle! and Pop!.
The deal will create a diversified food company with $10-billion in annual sales and will decrease Kellogg's dependence on the slow-growing cereal business. Kellogg also hopes to boost sales growth of its convenience foods by tapping Keebler's expertise with its direct store delivery system.
"The fit between these two companies is as natural as you can get," Keebler chief executive Sam Reed said in a statement.
"We have complementary strengths in Kellogg's traditional marketing and Keebler's in-store distribution and merchandising," he said. "Just think what our elves can do by bringing Kellogg's brands into our DSD system."
Kellogg managed to snap up Keebler for an attractive price. A number of Wall Street analysts had expected Keebler to fetch a price of about $45 a share rather than just $42 a share.
But Keebler's Mr. Reed said Keebler had gone through "a full auction process" and that there had been "great interest from a number of companies."
Kellogg expects the deal to close in the first quarter and plans to finance the acquisition through a combination of short-term and long-term debt.
"Strategically, I think it's a good move for them," Goldman Sachs analyst Romitha Malley said, noting it moves Kellogg away from the slow-growing cereal business and expands its convenience business.
CS First Boston analyst David Nelson, in a research report, also noted that Keebler will bring to Kellogg strong brand-building skills.
"Keebler has done a great job revitalizing Ernie and the elves; Kellogg has allowed Tony, Snap Crackle and Pop and Toucan Sam to languish," he said in the report.
Keebler was put up for sale in July by Flowers Industries Inc., which has a 55 percent stake in Keebler.
Kellogg said its headquarters will remain in Battle Creek, Mich., countering speculation it might move to Chicago.
The deal is the latest in a string of mergers in the consolidating U.S. food industry. In June, Bestfoods, the maker of Skippy peanut butter and Hellman's mayonnaise, accepted a $20.3-billion takeover bid from Anglo-Dutch group Unilever Plc.