Aurora Foods to Buy Kellogg’s Sagging Lender’s Bagels Division

Cereal giant Kellogg Co. said Monday it will sell its beleaguered Lender’s Bagels division to Aurora Foods Inc., owner of Log Cabin Syrup and Duncan Hines baking mixes, for $275 million in cash--41% less than Kellogg paid for the company three years ago.

San Francisco-based Aurora, a $1-billion company known for rescuing so-called orphan brands that have been neglected by huge food companies, expects to revive Lender’s sagging sales with a bigger marketing push, new product introductions and more contemporary packaging. Lender’s had posted sales of about $210 million in 1998, but was only marginally profitable, Kellogg’s executives say.

“Lender’s hadn’t joined the current age,” says Aurora Chairman and Chief Executive Ian Wilson. “They hadn’t had any new product offerings in 13 years. That’s unheard of in any category of the food business.”

Kellogg said it expects to record a charge to earnings of about $170 million before taxes as a result of the sale. The deal is expected to close in November.

Analysts say unloading the bagel company will help the Battle Creek, Mich., giant prop up its bottom line and revive its stock price, which has failed to rally despite the cost-cutting and streamlining efforts of new Chief Executive Carlos Gutierrez.

Kellogg had purchased 70-year-old Lender’s from Kraft Foods in 1996 for $466 million to help expand its presence in the faster-growing frozen food business. But, analysts say, the purchase was ill-conceived, coming at a time when shoppers already were turning to fresh bagels available in specialty shops.

“Quaker’s purchase of Snapple was the most glaring, the worst acquisition of the 1990s, but this was second,” says John McMillin, an analyst with Prudential Securities. “Kellogg got into the frozen bagel business just as everyone else was getting out.”

Sales of frozen bagels are still on the decline, slipping 12% in the 12 months ending July 2, while sales of fresh bagels edged up 4.4%, according to data from Information Resources.

Wilson says he believes that there is still a large customer base for frozen supermarket bagels, including homemakers and older shoppers who don’t want to make a special trip to a bagel shop.

By cutting costs, pouring more money into advertising and promotion and upping the size and variety of Lender’s bagels, Wilson believes he can revive the brand, which is No. 1 in its category.

“[Aurora] has stemmed the decline at all the brands it has acquired and been able to achieve a modicum of growth,” says David Nelson, a food industry analyst with Credit Suisse First Boston in New York. “With some more innovative marketing maybe they can rejuvenate this brand.”

In the last three years, Aurora has purchased Duncan Hines, Log Cabin, Mrs. Butterworth’s and Chef’s Choice. It also owns Van de Kamp’s, Mrs. Paul’s, Aunt Jemima’s and Celeste.

Kellogg’s shares dropped 31 cents to close at $36.69 on the New York Stock Exchange. Shares of Aurora declined 63 cents to close at $14.19.