Consumer Products

Would Warren Buffett Really Acquire Kellogg?

If you have followed Warren Buffett and Berkshire Hathaway Inc. (NYSE: BRK-A) for very long, you know that Mr. Buffett loves to make acquisitions. He particularly likes the so-called “whale of a deal” in size. Now the media and trading circles seem to have it in their head that Kellogg Company (NYSE: K) could be under the eyes of watchfulness of Buffett – as an acquisition target.

What investors would want to know going in here is that, even with this $24 billion market cap falling in the “whale” category, Warren Buffett buyout deals generally do not get leaked in the media.

At $68.00, Kellogg trades at 17 times expected earnings for 2014. That is a bit expensive for a Buffett buyout, at least on the surface. On top of the $24.4 billion market cap, Kellogg has a long-term direct debt of $5.4 billion before getting into $1.7 billion in other longer-term debts.

Kellogg’s net income was $1.8 billion in 2013, but cash flows after cap-ex and dividends simply are not there. Its yield is 2.7%, but Kellogg runs with a low cash position on its books.

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Perhaps the real interest is that the options trading in the May call options was around three times normal, but the reaction just doesn’t jive with any imminent buyout.

The acquisition criteria – These are companies with consistent earning power, with good returns on equity while employing little or no debt, with a management team in place. But Buffett also maintained that “the larger the company, the better” – with a desire to make an acquisition in the $5 billion to $20 billion range.

If the market really thought that Warren Buffett was going to acquire Kellogg, wouldn’t this stock be doing much better than being down by 0.6% at $68.00?

Kellogg shares did get within 1% of their all-time high on Tuesday, but then again the DJIA and S&P 500 both hit new all-time highs as well.