Willy Wonka Craves Some Sodium: Mars’ $35.9 Billion Acquisition of Kellanova

Source: Packaging Strategies

As much as I love chocolate and candy, there are always times when I simply prefer something salty. That makes me wonder: Has Willy Wonka ever craved something with a little more sodium? I mean, can someone really only have chocolate and candy all day? Well, it looks like Mars, the company behind our favorite chocolates and candies, decided that the best answer is "Why choose?"

On August 14, 2024, Mars Inc. developed a hankering for something a bit saltier to go with all that sugar— the confectionary giant announced that it would be acquiring Kellanova for a whopping $35.9 billion, which is a whole lot of M&M's.

This acquisition marks a significant shift in Mars' strategy, bringing together two iconic businesses with complementary portfolios and footprints. Kellanova, which was spun off from Kellogg Company in 2023, is home to popular brands such as Pringles, Cheez-It, Pop-Tarts, and Rice Krispies Treats. These will join Mars' existing portfolio, which includes global brands like M&M's, Snickers, and KIND. The combined entity will have annual revenues exceeding $63 billion, making it a formidable player in the global snacking industry.

As we unpack this mega-deal, the largest food and beverage deal since the $45 billion merger of Kraft and H.J. Heinz in 2015, we'll explore several crucial questions facing the snacking industry. How will this acquisition impact market concentration and pricing power in an already consolidated sector? Can Mars successfully navigate the shift towards healthier snacking options while maintaining its indulgent brands? What role will emerging trends like direct-to-consumer sales and the rise of GLP-1 weight loss drugs play in shaping the future of snacking? And perhaps most importantly, how will this deal affect innovation in an industry where smaller, nimble players have often led the charge in introducing novel products? The answers to these questions could determine not just the success of this acquisition but the very future of what we munch on during movie nights and mid-afternoon slumps.

Company Overviews:

Source: Made-In-Chicago Museum

Mars, Incorporated

Mars' story begins with a sweet tooth and a dream. Founded in 1911 by Frank C. Mars, who learned the art of hand-dipping chocolate from his mother, the company started as a small candy factory in Tacoma, Washington. Despite an initial setback, Frank's entrepreneurial spirit persevered. By 1920, he had returned to his home state of Minnesota and founded Mar-O-Bar Co., the earliest incarnation of the Mars we know today.

The company's first big break came in 1923 when Frank's son, Forrest Mars Sr., inspired by a popular milkshake, helped create the Milky Way bar. Advertised as a "chocolate malted milk in a candy bar," it quickly became a best-seller. Success followed success, with the introduction of Snickers in 1930 and 3 Musketeers in 1932.

Meanwhile, Forrest Sr. set his sights across the pond, launching Mars Limited in the United Kingdom and introducing the Mars bar in 1932. This marked the beginning of Mars' global expansion, a strategy that would define the company's growth for decades to come.

The 1940s saw Mars diversify beyond confectionery. In 1943, the company began producing parboiled rice for the U.S. Army, laying the foundation for what would become Uncle Ben's (now Ben's Original). In the same decade, Forrest Mars Sr. founded M&M's Chocolates, inspired by candy he had seen soldiers eating during the Spanish Civil War. The candy-coated chocolates that "melt in your mouth, not in your hand" quickly became an American icon.

As the decades rolled on, Mars continued to innovate and expand. The company entered the pet care market in the 1930s and significantly expanded this division in 1967 when it acquired Kal Kan Foods. In 1981, Mars Electronics International was established, venturing into the world of vending machine technology.

The late 20th and early 21st centuries saw Mars make several game-changing acquisitions. In 2008, the company purchased Wrigley for $23 billion, significantly expanding its confectionery portfolio. More recently, Mars has been focusing on diversifying its offerings, acquiring companies like Kind (healthy snack bars) in 2020 and expanding its pet care division with the $9 billion acquisition of VCA, an animal hospital company, in 2017.

Today, Mars is a global powerhouse with a diverse portfolio that extends far beyond its candy roots. With annual revenues exceeding $50 billion, 150,000+ associates, and operations in over 80 countries, Mars produces everything from chocolate bars and chewing gum to pet food and rice. Popular Mars brands include: Ben’s Original™, CESAR®, Cocoavia®, DOVE®, EXTRA®, KIND®, M&M’s®, SNICKERS®, PEDIGREE®, ROYAL CANIN®, and WHISKAS®. Yet, despite its massive size and popularity, Mars remains a privately held, family-owned business, allowing it to maintain a long-term perspective that has served it well for over a century.

Source: Snack Food & Wholesale Bakery

Kellanova

Kellanova might be a relatively new name in the corporate world, but its roots run deep in American snacking history. Born from a spin-off from the Kellogg Company in 2023, Kellanova emerged as a global snacking powerhouse, carrying forward the legacy of some of America's most beloved snack brands.

The story of Kellanova begins with Will Keith Kellogg, who founded the Kellogg Company in 1906. While Kellogg's is best known for its breakfast cereals, the company expanded into the snack food market over the decades, acquiring and developing brands that would eventually form the core of Kellanova's portfolio.

In 2023, recognizing the distinct dynamics of the global snacking market versus the North American cereal market, Kellogg's made the strategic decision to split into three independent public companies. This move gave birth to Kellanova, which inherited the global snacking, international cereal and noodles, and North American frozen breakfast brands.

Kellanova's brand roster reads like a who's who of pantry staples: Pringles, Cheez-It, Pop-Tarts, Rice Krispies Treats, Eggo, and MorningStar Farms, just to name a few. The company has also made strides in the better-for-you market with brands like RXBar and NutriGrain. This diverse portfolio allows Kellanova to cater to a wide range of consumer preferences, from indulgent treats to healthier snack options.

With a presence in 180 markets and approximately 23,000 employees, Kellanova has been on a mission to become the world's best snacking company since its inception. In 2023, Kellanova reported net sales of over $13 billion, showcasing its strong market position. The company has been investing heavily in brand building and innovation, particularly in emerging markets and in the better-for-you snacking category.

Despite its youth as an independent entity, Kellanova benefits from decades of brand-building experience and a deep understanding of consumer snacking habits. Its separation from the Kellogg Company allowed it to focus more intensely on the unique challenges and opportunities in the global snacking market, setting the stage for its acquisition by Mars.

Financially, Kellanova reported strong financials for Q2 2024, with net sales of $3.19 billion, reflecting a 4.7% year-over-year decline due to foreign currency impacts and the divestiture of its Russian business. However, organic net sales grew by 4%. Operating profit increased by 18% to $493 million, driven by improved gross margins, while diluted EPS rose by 17.6% to $1.00. Adjusted EPS was up 12.2%, reaching $1.01. Given its solid performance, Kellanova raised its full-year guidance, expecting at least 3.5% organic net sales growth and adjusted EPS between $3.65 and $3.75.

Source: Grand View Research

Industry Overview:

The global snacks market is valued at USD 692.52 billion in 2023 and is set to grow at a 4.2% compound annual growth rate (CAGR) from 2024 to 2030. Several key trends are fueling this expansion, reshaping the industry and influencing consumer behavior.

One of the most significant trends is the rise of on-the-go consumption, particularly among urban and younger demographics. Consumers, especially those with busy lifestyles, are gravitating toward snacks that offer a wide array of flavors and formats to cater to their diverse preferences. This shift has been accompanied by a growing demand for healthier and more convenient options. According to the Mondelez State of Snacking 2021 report, an increasing number of consumers are seeking snacks that are gluten-free (23%), organic (40%), low in sugar, carbs, or fat (43%), and high in protein or vitamins (48%).

As mentioned, convenience remains a top priority for consumers in today’s fast-paced world, with snacks often replacing full meals. Portable, easy-to-consume options are becoming meal replacements, as seen in a survey by Whisps in April 2023, which revealed that Americans are substituting an average of four meals per week with snacks. Although health-focused snacks are on the rise, indulgent treats remain popular, particularly during periods of stress like the pandemic, when comfort foods saw a notable boost.

In addition to convenience, premiumization is emerging as another key growth driver. Consumers are increasingly willing to spend more for unique, high-quality snacking experiences. This shift has coincided with the continued rise of the health and wellness trend, contributing to the growing demand for better-for-you products like protein-packed bars and vegetable-based chips. The health and wellness snacking category is projected to expand at a CAGR of 6-7% over the next five years, reflecting consumers’ continued interest in nutritious options.

From a segment perspective, savory snacks dominate the market, accounting for a 30.22% revenue share in 2023. This dominance is closely linked to the ongoing trend of snacks replacing traditional meals. Meanwhile, innovation is spurring growth across various other segments. For example, the frozen and refrigerated snacks segment is expected to grow at a CAGR of 5.5% from 2024 to 2030, driven by demand for convenient, easy-to-prepare food options. Companies are responding to these shifts by continuously introducing new flavors, ingredients, and formats.

Packaging is also evolving to meet modern consumer and environmental demands. Sustainable solutions are gaining traction, with the bags and pouches segment holding a 33.51% revenue share in 2023. A notable example of this trend is PepsiCo’s introduction of new paper outer bags for its Snack A Jacks multipacks in April 2024, a move expected to reduce greenhouse gas emissions by 52% per pack.

Distribution channels in the snacking industry are also undergoing significant transformation. While traditional outlets like hypermarkets and supermarkets still dominate, with a 62.09% revenue share in 2023, online shopping channels are experiencing rapid growth. Forecasts predict that online channels will register a 6.3% CAGR from 2024 to 2030, supported by a shift in consumer behavior—39% of shoppers now prefer to buy groceries through apps, and 61% plan to do more online grocery shopping in the near future.

Despite these positive trends, the industry faces notable challenges. Although snack food category volumes are down by 1%, sales continue to rise due to price hikes. Since 2019, category unit volumes have declined by 6-8%, while prices for candy, cookies, crackers, and salty snacks have increased by over 40%, exceeding the overall food industry’s price inflation of 30%. This strategy, driven by price increases rather than sales volume growth, has been widely adopted by companies to sustain or boost profits. As Kellanova’s CEO, Steve Cahillane, pointed out, “Consumers are getting more used to these prices,” reinforcing a “price-profit” cycle that has exacerbated inflationary pressures.

Source: Grand View Research

Market concentration is another defining characteristic of the snacking industry. In the snack bar category, the top three companies—General Mills, Mars, and Kellanova—control over 60% of the market. The cookie and cracker segments exhibit similar concentration, with four companies owning around 60% of the market. In the candy sector, the top three companies, including Mars, dominate over 80% of sales. This high level of concentration raises potential antitrust concerns, which could lead to reduced competition and, ultimately, higher prices for consumers.

Adding complexity to the market landscape is the rising popularity of GLP-1 agonists like Ozempic, originally developed for diabetes management but now used widely for weight loss. As more consumers adopt these medications, which curb appetite and reduce food intake, snack consumption could see a decline. This shift presents a potential challenge for companies heavily invested in the snacking sector and underscores the importance of product diversification and innovation in healthier snack options.

Competition in the snacking industry is fierce, with major players constantly vying for greater market share. Recent years have seen a surge in mergers and acquisitions (M&A) as companies seek to diversify their portfolios and gain scale to compete more effectively. Emerging markets in Asia and Africa represent significant growth opportunities, although they come with challenges such as distribution, tailoring products to local tastes, and navigating complex regulatory environments.

Deal Rationale:

Buyer’s Perspective

For Mars, this deal is about diversification and scale. Mars has long recognized that its over-reliance on confectionery poses a long-term risk, particularly as consumers move away from sugar-heavy snacks. By acquiring Kellanova, Mars gains instant access to leading positions in savory snacks, crackers, and frozen breakfast foods. This reduces their reliance on the chocolate and confectionery segment, which has faced challenges due to shifting consumer preferences towards healthier options.

The combined entity will have annual revenues exceeding $63 billion, putting it in the same league as industry giants like Nestlé and PepsiCo. This increased scale provides stronger negotiating power with retailers and suppliers, which is crucial in an inflationary environment. It also allows the company to better absorb rising costs and maintain price competitiveness.

On the one hand, Kellanova has a strong presence in regions like Africa, where Mars' footprint is relatively small. On the other hand, Mars dominates in China and Southeast Asia, markets where Kellanova has yet to make significant inroads. The geographic complementarity of these two businesses creates powerful synergies. By integrating Kellanova's products into Mars' well-established distribution network, Mars can accelerate its growth in emerging markets and reduce operational redundancies.

Kellanova also brings strong R&D capabilities, particularly in plant-based and better-for-you snacking. This complements Mars' existing innovation efforts and could lead to exciting new product developments. Imagine a Pringles line with Mars' confectionery expertise or a new KIND bar developed with Kellanova's snack seasoning technology. The acquisition also presents opportunities for interesting product innovations, with Kellanova's CEO already floating ideas like M&M's Pop-Tarts.

The combination creates significant opportunities for cost synergies through combined purchasing power, optimized manufacturing and distribution networks, and streamlined administrative functions. These cost savings will be essential as both companies seek to maintain profitability without passing excessive price increases onto consumers. The deal adds two new billion-dollar brands – Pringles and Cheez-It – to Mars' portfolio, which already includes 15 billion-dollar brands. It also expands Mars' health & wellness snacking offerings with brands like RXBar and NutriGrain.

Seller’s Perspective

From Kellanova's perspective, this deal offers several compelling benefits as well. The premium valuation provides a significant return for shareholders. As part of a privately held company, Kellanova's brands could benefit from increased investment and a more patient approach to growth, free from the pressures of quarterly earnings reports. Joining forces with Mars provides access to greater resources for brand investment, innovation, and global expansion.

Deal Structure:

On August 14th, 2024, Mars agreed to acquire Kellanova for $35.9 billion, including assumed net leverage. The purchase price of $83.50 per share in cash represents approximately a 44% premium to Kellanova's unaffected 30-trading day volume-weighted average price. Mars intends to finance the acquisition through a combination of cash on hand and new debt. Specifically, Mars has secured a debt financing commitment of $29 billion from JPMorgan Chase and Citi. The total consideration represents an acquisition multiple of 16.4x LTM adjusted EBITDA as of June 29, 2024. The deal is expected to close in the first half of 2025, subject to regulatory approvals and other customary closing conditions.

Citi is serving as financial advisor to Mars, with Skadden, Arps, Slate, Meagher & Flom LLP acting as legal advisor. On the Kellanova side, Goldman Sachs and Lazard are serving as financial advisors, while Kirkland & Ellis LLP is providing legal counsel. This is one of the largest deals in the history of the packaged food industry, even outpacing Mars' previous $23 billion acquisition of Wrigley in 2008. While the price tag is hefty, Mars is betting that the long-term growth potential of Kellanova's brands and the synergies generated by the deal will justify the premium valuation.

Deal Discussion:

The Mars-Kellanova deal is set to create a snacking behemoth that could reshape the competitive landscape of the global food industry, and this acquisition has many interesting points for discourse.

Firstly, the combined entity will have significant market power in several snack categories. For instance, in the snack bar category, where Mars already owns KIND and Kellanova has strong brands like Rice Krispies Treats, the combined market share could exceed 25%. This level of concentration is likely to attract scrutiny from antitrust regulators, particularly in the United States and Europe. We may see requirements for divestitures in certain categories as a condition for regulatory approval. Moreover, this high level of market concentration also raises concerns about its potential impact on consumers. With the combined entity controlling a substantial market share across various snack categories, there's a risk of reduced competition and potentially higher prices for consumers. This level of concentration could make it easier for the company to implement price increases, as we've seen in recent years, where snack prices have risen faster than overall food inflation. As for the employees, the deal could lead to job losses as the combined company seeks operational efficiencies. Mars-Kellanova will own brands with significant category crossover in snacking and breakfast bars, including NutriGrain, Rice Krispies Treats, Nature's Bakery, and possibly even Pop-Tarts and Kind. Unless they can find a way to boost unit volumes or are forced to divest certain brands by antitrust regulators, cost-cutting measures, including staff reductions and facility consolidations, may be implemented to meet profit targets.

Secondly, both companies have been working to improve the nutritional profiles of their products and introduce healthier alternatives. However, a recent study found that over 70% of 11,000 products made by Kellanova, Unilever, Nestle, Kraft Heinz, and General Mills were considered unhealthy. The portfolios of both Mars and Kellanova primarily consist of ultra-processed foods (UPFs), which have been linked to various health issues, including obesity, heart disease, and diabetes. The combined entity will need to carefully balance its portfolio between indulgent treats and healthier options to meet evolving consumer demands and address growing health concerns. Furthermore, it's crucial to consider the externalized costs associated with these products. The UN FAO estimates that the health-related costs of unhealthy diets, including those high in ultra-processed foods, add up to over $10 trillion annually. These costs are not factored into the shelf prices of products or the valuation of food companies, effectively creating a hidden subsidy for unhealthy food production. As the combined Mars-Kellanova entity becomes an even larger player in the global snacking market, there's a risk that the prevalence and marketing of these less healthy options could increase despite an ongoing shift to “better for you products.”

Classic Mars product calories and sugar content. Source: Daily Mail

"Healthy" Mars product calories and sugar content. Source: Daily Mail

Thirdly, integrating two large organizations with distinct cultures – Mars as a privately held, family-owned company and Kellanova as a public entity – will require careful management. Successfully integrating these cultures while retaining key talent will be crucial for realizing the full potential of this deal. The combined R&D capabilities of Mars and Kellanova could lead to exciting innovations in the snacking space. We might see new products that blend Mars' expertise in confectionery with Kellanova's strengths in savory snacks and better-for-you options. However, there's also a risk that the deal could stifle innovation in the broader industry. Smaller, innovative brands may find it increasingly difficult to compete, potentially limiting consumer choice and slowing the introduction of healthier snacking options.

Fourthly, the increased scale and resources of the combined entity could accelerate e-commerce and direct-to-consumer initiatives. This could include expanding online subscription services, developing exclusive online product offerings, and investing in advanced analytics to better understand and target consumers. As one of the largest food companies in the world, the combined Mars-Kellanova will face increased expectations to address global challenges like nutrition, food security, and climate change. Both companies have made commitments that will need to be reconciled and amplified post-acquisition. Kellanova's Better Days Promise initiative complements Mars' Sustainable in a Generation Plan. The combined entity will need to demonstrate tangible progress in decoupling business growth from greenhouse gas emissions and addressing other environmental concerns.

Finally, another relevant factor to consider is the potential impact of the rising popularity of GLP-1 agonists like Ozempic on the snacking industry. The rising popularity of GLP-1 agonists like Ozempic and Wegovy presents a significant challenge and potential opportunity for the new Mars-Kellanova entity. These weight loss medications have been rapidly gaining traction in recent years, with 11.8% of U.S. households having at least one GLP-1 user as of November 2023 and estimates suggesting up to 24 million people could be taking these drugs by 2035. The impact on snack consumption is substantial, with GLP-1 users consuming 20-35% fewer calories and spending 2.5% less on food overall. Notably, about 70% of users report consuming fewer confections and snacks— the categories that are core to both Mars and Kellanova's product portfolios. With Walmart already reporting a pullback in overall basket size and fewer calories purchased, Mars-Kellanova will need to act swiftly to mitigate potential losses in their traditional snack categories.

Source: LinkedIn

However, while the GLP-1 trend poses a clear threat to conventional snacking, it also presents an opportunity for Mars-Kellanova to lead the industry in adapting to these new consumer needs. The company will need to innovate rapidly to meet the changing needs of this growing consumer segment. This could involve developing "companion products" specifically designed for GLP-1 users, focusing on protein-rich products, exploring premium positioning, investing in products that promote sustainable weight management, and addressing the psychological aspects of weight loss through marketing strategies and product development. The acquisition's timing could be fortuitous in this context, as the combined R&D capabilities and diverse product portfolio of Mars-Kellanova could allow for faster innovation and adaptation to these market changes.

All in all, the acquisition presents an opportunity for Mars and Kellanova to take a leadership role in addressing some of the ethical and health concerns surrounding the snack food industry. As a larger, more influential company, they could set new standards for transparency in ingredient sourcing, commit to reducing sugar and artificial additives in their products, and invest in educating consumers about balanced diets and portion control.

Bear or Bull?

As always, when it comes to weighing the potential outcomes of a deal, it's important to consider both the bearish and bullish perspectives.

Bull

On the bullish side, the deal creates a snacking powerhouse with enhanced scale, negotiating power, and global reach. The complementary brand portfolios and geographic strengths provide numerous growth opportunities. Significant cost synergies and operational efficiencies could boost profitability, while enhanced innovation capabilities through combined R&D resources could lead to exciting new product developments. The transaction accelerates Mars' diversification beyond confectionery, reducing its exposure to changing consumer preferences in the candy segment.

Additionally, Mars' private ownership allows for a long-term perspective on brand building and market expansion. The combined entity will be better positioned to weather inflationary pressures and economic uncertainties. The geographic complementarity of Mars and Kellanova creates powerful synergies for global expansion, particularly in key markets like China and Africa. The increased scale and resources of the combined entity could accelerate sustainability initiatives, potentially setting new industry standards for environmental responsibility.

Bear

The bear case points to the high acquisition price and resulting debt burden, which could strain Mars' finances, especially if synergies are not realized quickly. Antitrust concerns could lead to forced divestitures, potentially reducing the value of the deal. Cultural integration challenges could lead to talent drain and operational inefficiencies, and the combined company might struggle to maintain the agility and innovation speed of a smaller, focused snacking company.

There's also the risk of potential cannibalization between overlapping product lines, which could hurt overall sales growth. Moreover, the shift towards healthier eating habits could impact demand for many of the combined company's core snack brands. If consumer behavior shifts more rapidly toward private-label products or lower-priced alternatives due to inflation, Mars could struggle to maintain its premium pricing strategy. The high level of market concentration resulting from this acquisition could stifle innovation in the snacking industry. Smaller, innovative brands may find it increasingly difficult to compete, potentially limiting consumer choice and slowing the introduction of healthier snacking options.

The rising popularity of GLP-1 agonists like Ozempic for weight management could also potentially reduce overall snack consumption, posing a long-term challenge to the combined company's core business. The deal may face increased scrutiny from health advocates and policymakers due to the high proportion of ultra-processed foods in both companies' portfolios. This could lead to regulatory challenges or increased pressure for reformulation of products.

Final Verdict: Cautiously Bullish

After chewing on all the facts, I'm leaning towards a cautiously bullish outlook on this deal. While the price tag is hefty and the integration challenges are real, the strategic rationale is compelling. The combined entity will have the scale, brand portfolio, and innovation capabilities to compete effectively in the evolving global snacking market. Mars' track record of successful acquisitions and long-term orientation as a private company provide confidence in its ability to extract value from this transformative deal.

The key to success will be maintaining the agility and innovation focus of Kellanova while leveraging Mars' global reach and resources. If executed well, this acquisition could position Mars-Kellanova as a dominant force in the global snacking industry for years to come. It's a bold move that comes with risks, but in the fast-changing world of consumer-packaged goods, sometimes you have to go big or go home.

But I guess no matter how the deal ends up, we can still look forward to the possibility of trying out M&M pop tarts or Dove-covered Pringles.