On June 21, Kellogg's (NYSE: K) announced that its Board of Directors had approved plans to separate its North American cereal and plant-based food business segments via tax-free spin-offs, resulting in three independent publicly-listed companies.

While the names for publicly listed entities will be determined at a later date, Kellogg's confirmed it would spin off its U.S., Canadian, and Caribbean cereal and plant-based business that accounted for 20% of net sales in 2021. 

The remaining business will focus on products such as global snacking, international cereal, and noodles -- which accounted for 80% of net sales last year. Kellogg's stated the spin-offs will be complete by the end of 2023.

So, what is a spin-off?

When an existing company divests a part of its business to form a new company, it's called a spin-off. The spun-off business will have a new name and will gain ownership of the assets, patents, and other intellectual property associated with the segment.

In a spin-off, existing shareholders will be awarded a 100% ownership interest in the form of a stock dividend. Further, shareholders may also be offered a discount to exchange shares of the parent company with shares of the new entity. For instance, shareholders may be eligible to exchange $50 worth of stock of the parent company for shares worth $55 of the spun-off company.

A spin-off may occur for various reasons and is also known as a "starburst" or a "spinout". Over the years, companies have undertaken spin-offs to focus on businesses with robust long-term prospects. Additionally, the management team may also focus on streamlining operations and lower cost structures which means a company will spin off loss-making businesses or those with lower profit margins.

Ideally, a spin-off should create value for all the stakeholders involved. Kellogg's emphasized it will generate a stable stream of revenue and improve profit margins as a stand-alone company in the next few years. According to Kellogg's, the three companies will be able to better focus on strategic priorities, enabling efficient allocation of capital and resources.