Kellogg Co. (K), the maker of breakfast cereals, Pop Tarts and other packaged food, rose the most in almost five years in New York after options trading signaled possible takeover activity.
The shares climbed 6% to $66.39 at the close yesterday, marking the biggest one-day gain since April 30, 2009. Before the jump, the stock had risen 2.6% this year. More than 25,000 contracts giving investors the right to buy the stock changed hands as of 4 p.m. yesterday, about 45 times the four-week average.
“This is absolutely the kind of options action that could signal takeover activity,” said Christopher Rich, head options strategist at JonesTrading Institutional Services LLC in Chicago. “Usually people sell out-of-the-money calls to generate extra income in a stock like this, but that was not what happened here this afternoon. There are definitely bullish Kellogg call buyers here.”
Kris Charles, a spokeswoman for Battle Creek, Michigan-based Kellogg, declined to comment on the share movement.
A block of 2,000 bullish options expiring in May with a $65 strike price traded at 1:47 p.m. New York time yesterday as the stock began to rally, making it the most-active contract after June $65 calls, according to data compiled by Bloomberg. Before yesterday, the stock hadn’t closed above that level since August.
Heinz Memories
The activity was similar to what happened right before Berkshire Hathaway Inc. (BRK/A) agreed to buy HJ Heinz Co. last year, Rich said.
“People remember the call buying in Heinz the day before the bid for the company,” he said. “Here’s another low-volatility food company that tends to be quiet and not move around a lot and we see this kind of stock and options trade and they get spooked.”
The company, whose biggest shareholder is the W.K. Kellogg Foundation, has a market value of $23.8 billion. That would make it a challenging target for all but the biggest acquirers. Surging option activity also doesn’t always lead to deals. In December, Campbell Soup Co. (CPB) saw record volume in a series of bullish options. While it remains the subject of takeover speculation, no transaction was announced.
Warren Buffett, Berkshire’s chief executive officer, told shareholders that the deal to take Heinz private could be a model for future deals. Berkshire acquired an $8 billion preferred stake, while Jorge Paulo Lemann’s 3G Capital took charge of operations. 3G and Omaha, Nebraska-based Berkshire each paid about $4.3 billion for the common equity.
Buffett typically buys majority control and leaves management in place. The Heinz deal “created a partnership template that may be used by Berkshire in future acquisitions of size,” Buffett wrote in a letter to shareholders that was posted online on March 1.
Buffett didn’t respond to a request for comment sent to an assistant.
Kellogg, which was founded more than 100 years ago, went public in 1952.
Bloomberg
