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Kellogg (K) to Buy Brazilian Food Maker, Buyback Trimmed

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As Kellogg Company (K - Free Report) continues to foray into emerging markets, it recently signed an agreement to buy a Latin American snacks manufacturer.

Kellogg is buying Ritmo Investimentos, the controlling shareholder of Parati SA, Afical Ltda and Pádua Ltda, known as Parati Group. The latest deal is in sync with its goal of becoming a global snacking giant as well as expanding its presence in emerging markets. It is also Kellogg’s fourth acquisition in emerging markets in the past two years and the largest in Latin America.

Financial Terms

The all-cash acquisition, which is expected to be completed late this year, is valued at R$1.38 billion, or roughly $429 million.

Meanwhile, owing to the all-cash deal, Kellogg is reducing its planned share-buyback program. It now expects to repurchase between $450 million and $550 million worth of shares, compared to the prior estimation of $700–$750 million.

The company expects the buyout to be neutral to earnings in 2016 and 2017 but will contribute to earnings in 2018 and beyond.

The Perks

Parati Group offers a wide range of iconic regional brands, including Parati, Pádua, Minueto, Zoo Cartoon and Hot Cracker biscuits. This makes up about 50% of the company's business. The rest comprises Trink powdered beverages, Parati Lamen instant noodles and Parati dried pasta.

Parati’s “strong presence” in small to medium high-frequency retail stores in Brazil helps it to reach the country’s growing customers base. In the words of Kellogg Chief Executive John Bryant, "Brazil is the largest economy in Latin America and this acquisition will allow us to accelerate our growth and improve our margins in the region."

Kellogg is slowly building its business in the emerging markets of Asia, Central and Eastern Europe, the Middle East and Africa. The Pringles acquisition has also opened up opportunities in these fast-growing nations.

Kellogg has tripled its emerging market business over the last decade. Currently 15% of Kellogg’s sales come from emerging markets. In particular, management targets well-performing countries like India, South Africa and Brazil for growth. Management is also increasing production capacity in emerging markets like Thailand, India, Malaysia and Poland to meet international demand.

As the prepackaged food facing muted growth in the U.S., many companies are looking abroad to reach increasingly urban and middle class consumers in emerging markets.

In order to expand its emerging market presence in 2015, Kellogg bought Mass Food Group, Egypt’s leading private cereal company; a majority stake in Egyptian packaged biscuits company, Bisco Misr and formed a joint venture with leading Nigerian food company, Tolaram Africa, to develop snacks and breakfast foods for the West African market. The company also acquired a 50% stake in Nigerian food distributor, Multipro – a member company of Tolaram Group – to expand its presence in the continent.

Zacks Rank & Key Picks

Kellogg currently holds a Zacks Rank #3 (Hold). Better-ranked food stocks include The Kraft Heinz Company (KHC - Free Report) , Sysco Corporation (SYY - Free Report) and ConAgra Foods, Inc. (CAG - Free Report) .

Kraft Heinz is expected to witness a 48.1% rise in 2016 earnings. The company sports a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

For Sysco, full-year 2016 earnings growth is expected at 10.6% and the stock carries a Zacks Rank #2 (Buy).

ConAgra Foods is expected to witness an 18.2% rise in fiscal 2017 earnings and the stock also carries a Zacks Rank #2.

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