Kraft announces split, 18 months after Cadbury buy
NEW YORK (Reuters) - Kraft Foods Inc Chief Executive Irene Rosenfeld is breaking up the food giant in a move that has been percolating at Kraft for several years but caught the market by surprise, coming only 18 months after the acquisition of Cadbury.
The split gives investors the chance to bet on a snacks business that is growing fast in emerging markets, or opt for the stable dividends offered by a slower-growing general grocery business that includes Oscar Mayer lunch meat and Kraft cheese.
The $48 billion company's spin-off of its grocery business is the latest in a broad trend of corporate breakups that includes Fortune Brands Inc, ConocoPhillips and ITT Corp.
It was also a surprise as Kraft's shares have outperformed the broader market and those of rival food makers PepsiCo Inc and Nestle since Kraft won Cadbury in February 2010.
"That's why we are kind of scratching our heads as to why split up the businesses now after just 18 months," Morningstar analyst Erin Lash said.
Rosenfeld said Kraft has looked at the idea of a split ever since it bought the Lu cookie business in 2007 and that now was a good time to make the move.
Analysts also look at Kraft's shareholder base for the answer.
The announcement on Thursday comes just weeks after billionaire investor Nelson Peltz disclosed a 12.2 million share or 0.66 percent stake in Kraft through his firm Trian Fund Management. Another activist, William Ackman, took a 1.3 percent stake through his Pershing Square firm in March.
"They've had a number of activists on and off their shareholder registry in the last four years," said Frank Maher, head of KeyBanc Capital Markets' Food & Beverage investment banking team, though he stressed that was probably not the only factor for the split.
The company expects the split to take about a year and should be completed by the end of 2012.
"This is a very interesting, elegant solution for an issue that they faced -- how do you appropriately capitalize value and get credit for two distinctly different businesses with different priorities and challenges," he said.
The snack business, with annual sales of $32 billion, operates in high-growth emerging markets with products like Oreo and Lu cookies, Cadbury chocolates and Trident gum.
The North American grocery business, with annual sales of $16 billion, is focused in more mature markets but has high profit margins with products like Kraft and Velveeta cheeses, Maxwell House coffee and Capri Sun drinks.
Analysts also said it could lead to more deal-making by Kraft going forward, with UBS analyst Kaumil Gajrawala speculating that Kraft could try to buy the Frito-Lay snacks business, which Rosenfeld once ran, from PepsiCo Inc.
Maher said there are also opportunities for the grocery business, given the flurry of activity in the sector, which includes the breakups of Sara Lee and Ralcorp Holding.
Both Peltz and Warren Buffett, Kraft's largest shareholder with a nearly 6 percent stake, support the split, CNBC reported. Neither could be reached by Reuters.
"We are very supportive of management's decision to execute the Kraft spin-off and have always believed that value would be unlocked by such a separation," he told Reuters.
Kraft, North America's largest packaged foods company, also reported higher-than-expected second-quarter earnings and raised its full-year outlook.
Its shares closed down 1.5 percent at $33.78 on the New York Stock Exchange on Thursday. The Dow and the S&P 500 indexes closed down more than 4 percent in the worst sell-off in two years.
Janney Capital Markets analyst Jonathan Feeney estimates the sum of Kraft's parts could be worth $37 per share, based on a trading multiple of 10.5 times estimated 2012 earnings for the 60 percent of company profit generated by the snacks business, and an 8.5 multiple for the other business.
Feeney said the split made "some sense, but (was) not a game changer."
"It seems as though everyone is at the break-up game these days," Bernstein analyst Alexia Howard said in a research note. "We wonder if there is any read across here for companies like Campbell Soup Co or even H.J. Heinz."
Kraft was advised on the split by Centerview Partners, Evercore Partners and Goldman Sachs.
EARNINGS BEAT, RAISES OUTLOOK
Kraft reported second-quarter adjusted earnings of 62 cents per share, topping the average analyst estimate of 58 cents, according to Thomson Reuters I/B/E/S.
Net revenue rose 13.3 percent to $13.9 billion. Organic revenue rose 7.1 percent, with price increases contributing 5.5 percentage points of that rise, and the rest coming from volume and mix of products.
The company said it now expects 2011 operating earnings of at least $2.25 per share and organic revenue growth of at least 5 percent. Its prior forecast called for earnings of at least $2.20 per share and revenue growth of at least 4 percent.
Kraft said it expects costs to rise by a low-teen percentage rate this year due to higher costs for fuel and commodities. It earlier forecast a high-single-digit increase.
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