Motley Fool Hidden Gems Investing - The Battle For Breakfast

Episode Date: September 18, 2023

Kellogg’s is spinning off its core cereal business to focus on the fast-growing snacks market. (00:11) Jason Moser and Deidre Woollard discuss: - Why Kellogg’s is splitting up its business. - If snacks still have growth potential. - Monster’s ability to become a 100-year brand. (13:35)  Ricky Mulvey and John Nash analyze newly-listed TKO Holdings, the company that runs both WWE and UFC, and address the challenges it may face in the future. Companies discussed: K, TKO, MNST, CELH Host: Deidre Woollard Guests: Jason Moser, Ricky Mulvey, John Nash Producer: Ricky Mulvey Engineers: Rick Engdahl Learn more about your ad choices. Visit megaphone.fm/adchoices

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So bundle up and come along for the bumpy ride. Stream a new episode of North of North Tuesdays on CBC Gem. has tony the tiger lost his charm motley fool money starts now welcome to motley fool money i'm deidre willard here with motley fool analyst jason moser it's another food centered monday welcome jason hey deidre how are you i love to talk food with you uh we covered some interesting food related mergers uh recently last week we had Hostess and Smuckers. We're going in a different and yet related direction today and talk about a split between Kellogg's and itself. So this has been in the works for a

while, but we have an official date on October 2nd. It's splitting into two independently traded companies, Kelanova and WK Kellogg. Now this is interesting because Kelanova sounds like it's the new thing, but it's actually going to keep trading under the existing ticker K, which is such a great ticker. And W.K. Kellogg is going to take the cereal brands into a separate company. So, does that sort of take the emphasis away from the world of cereal? I don't think so. I mean, when you look at cereal, I mean, it's a $10.5 billion industry here domestically. And that's according to data provided by Nielsen. I mean, it's still the number one breakfast food choice for kids and number two for adults. I mean, it's terribly convenient.

Some of it maybe is better for you than others. But yeah, I think, for me, you start to see the power of cereal. And I know that sounds kind of funny to say, but the fact of the matter is, clearly, it's something that consumers keep in their pantry, I think virtually at all times. In wondering why they put cereal on its own, I think ultimately this really just gives them a chance to focus on that one particular strategy when it comes to cereal versus the rest of the business, which is more snack-centric. You look at the portfolio of brands that Kellogg has in total, it's impressive, but cereal is really only just one part of that. This really gives them, I think, the opportunity to focus on, you know, the strategies for snacks and the strategies

for cereal. Yeah, it's sort of interesting because you have companies like Kraft Heinz, they're just like a whole conglomeration of brands, similar with PepsiCo with all of the Frito-Lay stuff. I want to talk a little bit about Kelanova. So, they're keeping the international cereal business in that, and I thought that was interesting. You've got the current CEO of Kellogg's. He's staying on as the chairman of Kelanova. And he sees a lot of growth in snacks and also in noodles. Apparently, noodles are a very big business across the world. So, what does this mean? So, should we think of the Kelanova part as a sort of exciting, emerging brand? Yeah, I think that's safe to say. I mean, we certainly like our snacks here

domestically, but that, I think, really is all around the world. So, I mean, it's safe to say there probably is some saturation here to an extent, but I think when you pan out and you look at the global opportunity, that's what leads them to believe this is the right move. And so, you know, again, looking at this growth strategy, you look at the Calanova side of the business, I mean, this is where they really see the growth potential, right? And it is certainly a more growth-oriented portfolio. Just over the last three years, they've grown revenue on this side of the business at a 9% annualized rate, which is pretty impressive for the food business. Ultimately, going back to the snacks, snacks represent 60% of the overall business anyway.

Again, I think they see this Kelanova side of the business as really the opportunity to shine a light on the growth potential. In the food business, it's not an industry really known for these robust growth numbers, right? And so, I think this gives them the opportunity really to kind of shine a light on the growth potential on the Kelanova side. Yeah. One of the things I found was interesting is that 50% of that business comes from five brands, Pringles, Cheez-Its, Rice Krispie Treats, Pop-Tarts, and Eggo. I don't know why Rice Krispie Treats didn't get to stay with W.K. Kellogg. Those things are delightful. I love them. Look at what they've done with the Pringles business, right? I mean, you wouldn't even

really think about this. They acquired Pringles back in 2012. They've doubled that business since they acquired it. So again, just goes to show you the power of having that portfolio of those different brands and really the global distribution, because I can tell you just having traveled around the world, I mean, Pringles are a very popular item pretty much everywhere you go. There is a comfort in seeing Pringles in a strange place. Let's switch over and talk about the Kellogg side. So on this side, you've got Gary Pilnick. He's a longtime veteran of Kellogg. He's going to be the CEO over W.K. Kellogg. Now they're calling it an 117-year-old startup. I don't know. I mean, they've got the legacy brands. Nine of the top 20 cereal brands

are Kellogg's and probably the rest are General Mills, but who knows? They do have some younger brands like like cashy and bare naked granola what do you think is is this really an 117 year old startup i mean you have to love the enthusiasm right and i think ultimately like we we can we can joke about it it is it is kind of funny to think um think about but i think it's really more the mindset than anything else right i mean you creating that mindset that yeah i mean listen cereal cereal but but it's all about looking toward the future and and that's what you want leadership regardless of the company. You just don't want leadership that's going to rest on their laurels. How much innovation can you expect in this market? I don't know. Probably not a ton.

Cereal will likely be quite the same for the rest of our lives. But hey, that's a good thing. Given its popularity, there's something to be said for that. I think ultimately, I like creating that mindset looking forward to the future because as we know, that's really what investing is all all about yeah yeah i definitely think that there's there's room for changes i mean they talked a little bit about moving the brands themselves beyond cereal and they talked about cereal as itself as a snacking opportunity because it seems like what they're noticing and i think this is i think we've all noticed this is that we spend less time with the with the bowl and the milk and more time with the the hand in the box so i think there there is an opportunity there to

sort of move a little bit beyond what we traditionally imagine cereal. But there is a larger question here, which is the health factor. And there's been concerns about gluten, there's concerns about sugar. So I think the brand itself, maybe with the cashier and especially with the bare naked, they kind of have to evolve a little bit beyond the beloved brands that we think of as childhood favorites. Oh, there's no question about it. I mean, I think that's ultimately part of it in really being able to focus on the cereal portfolio, for example, is just being able to ultimately deliver what people want. It's such a wide world of assortments there. Some focus maybe on the health side of things more than others. You want to be able to just ultimately scratch

every itch there. That's what I think this ultimately gives them the opportunity to do. If you had the opportunity to invest in either one, are you going Kellenova or WK Kellogg? If you could only choose one. So, I love cereal, don't get me wrong. But I think the growth prospects of Kelanova are a little bit more attractive to me. And I think most of that really is, you think about the opportunity in snacks, and I've got a salt tooth probably more than a sweet tooth. I mean, I eat plenty of cereal, but man, the salty snacks for me are where it's at. And we've seen really companies like Pepsi through the years. Pepsi has benefited so, so much just from having that snack side of the business. And so, given the growth prospects

there, I think I'm a little bit more favoring of the Kelanova business. Do you think there's a comparison here between what Johnson & Johnson did with spinning off their consumer brands into Kenview recently? Because, I mean, it seems sort of similar because you've got legacy businesses. I mean, with Johnson & Johnson, you also had some lawsuits and concerns that sort of prompted that. but i can can views had a it's been it's been like out like a month so it's a little a little bit too certain to to uh to speculate on the success of that but do you think that the mechanics here are similar in how these two companies uh spin off from each other yeah i think that's fair i mean you're giving you're giving the respective businesses a chance to shine and grow and do their

own thing right j and j split up some rather different businesses where kellogg maybe there's some more similarities there. But I think ultimately, at the end of the day, the strategy is very similar, yeah. Yeah. Well, as we wrap up, this had me sort of thinking about food in general as an investment, consumer packaged goods. It's not exactly the most exciting thing for investors. It seems to be, it's a relatively steady thing. You just keep adding more brands, you keep adding more flavors. And then I thought about drinks and how we've seen things like Monster and Celsius, you know, it's become these pun intended monster businesses, but you had to do it. But this, like, why? I wonder to myself, like, why is it so much easier for a

drink to become very, very popular, but a particular snack food or a line of food in general doesn't really take off that way? Yeah, it's a good question. You know, I think that when you consider Monster, I think Monster is unique because it essentially was kind of like a category creator, right? I mean, I don't know that they invented the energy drink, but I mean, it's something new beyond soda or coffee or just kind of what we were used to for so long. So I think part of the reason why Monster has done so well is because, you know, it was kind of starting from ground level, right? It was a bit of a category creator. I mean, fast forward 10, maybe 20 years. I'm sure that looks a little bit different than it does today, but clearly,

we've seen more entrance into that market. You mentioned Celsius. It's clearly a very competitive market. You're starting to see that play out in Monster's performance there. Margin is starting to come down a little bit, growth is starting to slow a little bit. I think part of it was just that category creator. But there are some other challenges that you deal with in the food space that you don't necessarily deal with in the drink space. One thing that comes to mind, I know that private label competition exists in the beverage space, but I don't think Monster really suffers or is really threatened by that private label competition that you would see in the food market. I think you fast-forward 10 or 20 years, the market for something like

like a Monster looks a little bit different, but it kind of goes back to that idea of the category creator. Interesting. So, do you think, looking forward, that Monster eventually, they get a bunch of brands under it and they have that sort of like a Kellogg's kind of trajectory? In 100 years, is Monster the Kellogg's? It's possible. You know, it's absolutely possible, but it's also possible that another company out there is looking at Monster today and thinking, you know what, we really want to have that dynamic in our portfolio. So, either, you know, one of two things is going to happen. Monster is going to need to evolve by either, you know, coming up with some kind of new category or new beverage. They're going to need to

make some acquisitions or, you know, someone out there is going to see the merits of that business and decide they want it for themselves. Yeah, it's interesting to speculate what could, what kind of food could make a new category. I mean, we saw that with Beyond Meat and that did has not gone well so far. So, I think you really would need a new category that sort of captured the imagination and people. That's a really hard thing to do. Yeah. Disruption in the food market is pretty difficult. I mean, you kind of think of Starbucks and coffee and like, I mean, I'm pretty sure that 100 years from now, I mean, people are still going to be drinking coffee and they're going to be drinking it the same way we kind of always have.

Now, maybe that changes. I don't think either one of us will be around to see that. But I think for the rest of our lives, at least coffee is going to be very difficult to disrupt. Yeah, I think when it comes to beverages, it is fun to think about iteration and evolution and such in the food and beverage market. It's a lot easier said than done. Yeah, absolutely. Thanks so much for your time today, Jason. Thank you. The bell has been rung at TKO Holdings. A new company built from WWE and UFC is now battling on the New York Stock Exchange.

Ricky Mulvey and combat sports journalist John Nash break down what happens next and a lawsuit that could be a body blow for the company. You just found out that your sales team is at risk of missing quota. Don't panic. Just ask Rippling AI. Since it's built on your real-time people and business data, Rippling AI can pull metrics from Rippling and Salesforce into a meeting-ready dashboard showing quota attainment, headcount plan, and monthly revenue to quota by region.

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us now is john s nash he's a mixed martial arts journalist writing for the bloody elbow and hosts the hey not the face podcast welcome to the show john yeah people are probably confused tremendously by the titles of the website and my podcast. What does that have to do with anything? Well, if we're going to talk about the business of combat sports, I think both of those titles probably make sense versus a more traditional financial media outlet. So I'm excited to get your perspective on this. UFC and the WWE have combined in creating one organization. I mean, at a surface level, why do you think investors are excited about this new entity? because both have dominant market power in their in their fields and they're the basically the

only companies especially casuals people that are outside the sports that are in the world of those sports those are the only two entities they know about in those sports so that they have brand name familiarity they they dominate they both dominate their their market space uh wwe has a little bit of uh competition with the uh aew i'm not a pro wrestling fan so i might screw up the pro wrestling side but uh aew so they have that but they still are the huge people are everybody knows what the w is they've heard it they've heard kids talk about it whatever and ufc is this thing that's grown massively and they know it's the they they own basically own a sport and i think that's exciting to investors i think the representatives from one fc may disagree with you there john

but um i think that one of the most incredible parts of this story is that the w the control if the wwe has been taken away from the mc from from vince mcmahon through this new group and and by this this uh by endeavor and the new group led by ari emmanuel yeah well that's i thought vince mcmahon's been put in a key position ahead of everybody in the ufc and wwe so he oversees both those reports only to endeavor and what's fascinating was you know correct me if i'm wrong but there was there was basically a mutiny at wwe a while ago uh he was going to get expelled as ownership control the company he negotiated a thing where he would negotiate the sale of the company and then he went around and sold merged the company instead with endeavor and they put

him in charge so it's i mean this is straight out of the tv series succession this is this was this was classic i don't know that vince mcmahon machinery right here to stay in power so i on that even though he's technically no longer the sole owner creator he's he still has more control than he was in the the other version of uh the other trajectory they were taking yeah my understanding is that he stepped back from sort of the public facing role in response to a lot of the the accusations but he wasn't he wasn't he wasn't giving up his ownership control if you will yeah um but the reason i want to focus on the combat sports side because as this company went public. A lot of the company's leaders were making the rounds on financial media.

And there was just this sticking point that I found when TKO president and chief operating officer Mark Shapiro went on CNBC and was in this response to this claim that maybe this Saudi Arabian-backed mixed martial arts league would create these dramatic increase in fighter pay, which I disagree with the premise of the question. But anyway, on the question about fighter pay, Shapiro said, quote, first of all, fighter pay has grown at a faster clip than overall UFC revenue. And more to the point, UFC's overall revenue is driven by high margin revenue streams, which can absorb anticipated or unanticipated increases in fighter pay while still resulting and margin accretion, end quote. You've written extensively about how through UFC's revenue

growth, fighter pay necessarily hasn't grown with it at all. So I'm wondering where there might be a difference of opinion here between you and Chief Operating Officer Mark Shapiro. Yeah. I mean, there's currently a lawsuit against the UFC. And in disclosure, The UFC revealed documents about the lender presentation they did when William Morris, WMME, which now is Endeavor, bought the company. And their whole plan was we can freeze fighter pay as a percentage of our revenue, so it's not going to increase. In fact, looking at the numbers, it seems like it's decreased in recent years. So his argument that it's increased faster in revenue, well, it doesn't line up with what you reported in the antitrust lawsuit. Also, in a filing by the defendants, the UFC, they seem to concede that fighter pay has not risen as fast as revenue.

Now, if you go back to a previous earnings report that they did, a conference call, it was reported during that they pinpointed how they got this number. And that is they went back to 2005 under the previous ownership. in 2005 was the they picked that year and they said since that year fighter pay has outpaced revenue right well 2005 is a very special year because that's the first year after the ufc blew up after the top the ultimate fighter show revenue skyrocketed fighter pay was locked in the previous contract that was the lowest that was the lowest paying year as a percentage of revenue the ufc ever had ufc was paying 40 of the revenue to fighters in the first 2001 2002 2003 24% in 2003. And then in 2005, it plummeted down to like 9% of revenue. So if they would have just

used 2004 or 2006, it wouldn't be a true statement. But by starting with 2005, that's the one year you can make that statement and it ends up being a true statement. Well, and the thing that's also key about this is that Endeavor had no ownership stake in the company at that time. Yeah, none. so they they bought it in 2016 and if you look at 2016 fighter pay in that year as was like 22 23 percent it actually went up a bit they had a bump that year and it looks like we calculated and estimated fighter pay in 2021 uh or yeah 2022 actually was around 13 to 14 percent um and you know we can get into the calculations based on what the zufa said the ufc the reports but it's obviously gone down since the peak year was the first year that Endeavor bought it. As a percentage,

as a wage share, they're going to say, well, wage levels have increased. But as a wage share, it's obviously gone down. Well, it's also, and it's maybe not a perhaps, it might not be an appropriate comparison because the number of events have skyrocketed since then as well. So the level argument might be a little different. I guess I'm going back to the 2005 case. I want to move, though, when we talk about fighter pay, the reason it's important for this new company is because it is facing a lawsuit. It's called Lee versus Zufa. UFC fighters claim that the organization used anti-competitive practices to suppress pay and force fighters into restrictive covenants. One example would be using their likeness for free on video games,

and the fighters don't get any revenue from that. In one of these suits, the fighters were recently granted class certification. After many years, it happened in August. Can you explain why this is a big deal for the fighters to get that class certification in this lawsuit? Well, because when you're doing a class action, one of the major hurdles is getting class certification. If you sue as individuals, you could have all the evidence in the world and you could win, but the damages are limited because you're doing individual cases. But class cert, this applies to a wide range of fighters, 1,200 fighters to be exact. So the damages are greatly increased. On top of that, it's an antitrust case. If it goes to trial and the plaintiffs win, then the damages get

tripled. So those vast damages get tripled if they win in a trial. And because it's a class action, the judge can offer remedy, injunctive relief, and basically force changes in the industry so that these damages don't continue in the future. So the reason the class certification is in fact you're allowed to appeal class certificate because usually a class certification is a victory if you get class granted class certification and can go ahead as a class action odds are is the opposing side is going to be forced to settle because almost all cases settle because appeals are rejected and the ninth circuit there's they they reject like 80 percent of appeals so it's considered such a massive hurdle that uh and and such a in the potential damages

and stuff are so vast that it's almost often can be viewed as basically the decision in the court, that this is as important as a trial decision. So that's huge. And I think a lot of people are ignoring that. They're not really paying attention. But the next step after that then is now we have to wait and see what happens to appeal. Okay. So let's say the plaintiffs win a massive settlement. They're arguing about contracts up through 2017. It's getting some attention among the business in MMA media. Contracts have changed since then. Now fighters are in a, what is it, an anti-arbitration or a forced arbitration clause, which means they can't take arguments to a jury trial like this. Is this, let's, okay, so let's say that the plaintiffs win a massive

settlement. Would this fundamentally change the business of this new TKO enterprise or is it a big one-time payout and then they can go along their merry way? Well, the current case would be a one-time payout. There's two cases ongoing. There's the Lee v. Zuffa from 2010 to 2017 that covers. And then from 2017 on is another case, Johnson v. Zuffa, which is basically the identical case, but it starts up at a different class period. If we go to trial next year, which is what the judge says he wants, so if appeal doesn't work and they go to trial, then the end result of that would be just damages. And if they lose the trial, the damages, though, could be vast. Their Their expert says that they estimate damages from anywhere from $800 million to $1.6 billion.

And, of course, if you lose and you get trebled, that becomes $2.4 billion to $4.8 billion. No matter what, that's a lot of damages. That's a lot of money. So that's going to hurt a company that has to cover that. But on top of that, you've now set the precedent that they've engaged in antitrust violations. They've monopsonized the sport. so you can take that into the next case and make you a stronger case now as you mentioned the the the defendants there have made every fighter in the ufc have now signed a waiver an arbitration

agreement saying that you have to go to arbitration and a class action waiver the plaintiffs are going to contest that take it to court and see if the argue that the ufc used their monopsony power to force fighters to sign these and so they shouldn't be the court shouldn't accept them but if they do of that eliminates a huge amount of plaintiffs, right? But it doesn't eliminate the injunctive relief part. If they wanted to, they could continue the case forward and go and ask for injunctive release. They might not get damages for all those fighters that are in waivers, but the court could combine the Lee versus Johnson case, and this would be several years down the road, but then say, we have to do some sort of injunctive relief. They've already tipped their

hat what they're calling for, for injunctive relief, the plaintiffs. There was a case in boxing in the 60s, late 50s, a monopoly case called the International Boxing Club of New York. And in that case, the court ordered that no contracts could be exclusive for the next five years. In other words, anyone signed to the International Boxing Club of New York could go fight for anybody else and sign contracts with anybody else. And in this case, you've seen it that they've asked for contracts to be limited to one or two years maximum with no extensions possible, which would dramatically change the industry landscape because all the big fighters, if you watch the UFC and you know like there's a fight like John Jones and Francis Ngannou is a

massive fight inside or outside the UFC those two guys Francis Ngannou is outside the UFC right now but John Jones could sit for a year and then say okay now I'm going to take the highest bidder to go fight Francis Ngannou and you can see that just across the all the top major fights could be made that way which would drastically increase the amount that fighters are making final question This is a nerdy one. I enjoy watching Dana White's Contender Series on ESPN+. It's basically a tryout competition for the UFC. But, John, one thing that consistently bothers me is they always celebrate,

this fighter's getting a contract. They never say what is in these contracts, though. It's just, hey, you get a contract. Do you have any insight into what is actually in these contracts? Oh, yeah. We all know what's in the contracts. I have several of them. it's uh the the contenders contract you get five thousand dollars to show and five thousand dollars

additional if you win then if you get a ufc contract you're coming in almost always from contender series on a ten thousand dollars to show guaranteed you know that's your purse when you show up for the event and actually have the fight and then a ten thousand dollar bonus to win and you're signed to four i think it's a four or five fight deal i can't remember the exact number right now but i think it's four fights in the ufc when you're you're entering from contenders and all these other provisions in it that now you also have to sign away your video game rights, all your image rights, your merchandise rights the UFC gets to do. So you give up a lot.

Our guest is John S. Nash. He is a mixed martial arts journalist writing for the Bloody Elbow. His podcast is called Hey, Not the Face. In his free time, he enjoys debating the legitimacy of credit rating agencies with mixed martial arts pioneer Pat Miletic. John, thank you so much for joining us on Motley Fool Money. Appreciate it. Yes, and I won that debate. As always, people on the program may have interest in the stocks they talk about,

and The Motley Fool may have formal recommendations for or against, so don't buy or sell stocks based solely on what you hear. I'm Deidre Willard, thanks for listening, we'll see you tomorrow.