Snacks & Candy

Crafting Two New Krafts

Details on plan to split into two independent, publicly traded snacks, grocery companies

NORTHFIELD, Ill. -- Along with dunking it in milk, the accepted way to eat an Oreo cookie is to twist it apart to get at the creamy filling. Now, the maker of Oreosexpects todo just that--with itself. Kraft Foods Inc. said that it is planning a split into two companies to get at the most value from each.

As reported in a Morgan Keegan/CSP Daily News Flash yesterday, Kraft Foods Inc. announced that its board intends to create two independent public companies: A high-growth global snacks business with estimated revenue of approximately $32 billion and a high-margin [image-nocss] North American grocery business with estimated revenue of approximately $16 billion.

The company expects to create these companies through a tax-free spinoff of the North American grocery business to Kraft Foods shareholders.

A Kraft spokesperson told CSP Daily News, "What we're telling our business partners is--business as usual. There are no immediate changes to our operations. We will continue to focus on what we do best--making, marketing and selling our range of high-quality and delicious products. We are still in the early stages of this process and we are working to develop detailed plans for each business. This work will likely take at least 12 months, with a target of year-end 2012 for the launch of the new companies. We will keep our customers and other business partners informed as we create these two companies."Northfield, Ill.-based Kraft also reported second-quarter 2011 net earnings of $976 million, up 3.9% from second-quarter 2010 net earnings of $939 million. It reported net revenues of $13.9 billion, up 13.3% from second-quarter 2010 net revenues of $12.3 billion.

"As our second-quarter results once again show, our businesses are benefiting from a virtuous cycle of growth and investment, which we fully expect will continue," said chairman and CEO Irene Rosenfeld. "We have built two strong, but distinct, portfolios. Our strategic actions have put us in a position to create two great companies, each with the leadership, resources and strong market positions to realize their full potential. The next phase of our development recognizes the distinct priorities within our portfolio. The global snacks business has tremendous opportunities for growth as consumer demand for snacks increases around the world. The North American grocery business has a remarkable set of iconic brands, industry-leading margins, and the clear ability to generate significant cash flow."

Over the last several years, Kraft has transformed its portfolio by expanding geographically and by building its presence in the fast-growing snacking category. A series of strategic acquisitions, notably of Danone and Cadbury, together with the strong organic growth of its "power" brands, have made Kraft the world's leading snacks company, it said.

The company has built a global snacking platform and a North American grocery business that now differ in their future strategic priorities, growth profiles and operational focus, it added. For example, Kraft Foods' snacks business is focused largely on capitalizing on global consumer snacking trends, building its strength in fast-growing developing markets and in instant consumption channels; the North American grocery business is investing to grow revenue in line with its categories in traditional grocery channels through product innovation and marketing, while driving margins and cash flows.

A detailed review by the board and management has shown that these two businesses would now benefit from being run independently of each other.

The company said it believes that creating two public companies would offer a number of opportunities: Each business would focus on its distinct strategic priorities, with financial targets that best fit its own markets and unique opportunities; each would be able to allocate resources and deploy capital in a manner consistent with its strategic priorities in order to optimize total returns to shareholders; and investors would be able to value the two companies based on their particular operational and financial characteristics and thus invest accordingly.

Global snacks will consist of the current Kraft Foods Europe and Developing Markets units as well as the North American snacks and confectionery businesses. Approximately 75% of revenues would be from snacks around the world, and approximately 42% would come from developing markets, including a diversified presence in numerous highly attractive emerging markets. The business would have a strong presence in the fast-growing and high-margin instant consumption channel. The nonsnacks portion of the portfolio would consist primarily of powdered beverages and coffee, which have a strong growth and margin profile in developing markets and Europe. Key brands would include Oreo and LU biscuits, Cadbury and Milka chocolates, Trident gum, Jacobs coffee,and Tang powdered beverages.

The North American grocery business would consist of the current U.S. beverages, cheese, convenient meals and grocery segments and the non-snack categories in Canada and foodservice. It would have a highly competitive retail presence, cost leadership and a continued commitment to innovation and marketing excellence. North America's strategic priorities would be to build on its leading market positions by growing in line with its categories while maintaining a sharp focus on its cost structure. Capitalizing on the investments that the company has made during its transformation, an independent North American business would be managed to deliver reliable revenue growth; strong margins and free cash flow; and a highly competitive dividend payout.

Key brands would include Kraft macaroni and cheese, Oscar Mayer meats, Philadelphiacream cheese, Maxwell House coffee, Capri Sun beverages, Jell-O desserts and Miracle Whip salad dressing.

Any transaction would be subject to customary conditions, including receipt of regulatory approvals, an opinion from tax counsel and a favorable ruling from the Internal Revenue Service to ensure the tax-free status of the spinoff of the North American grocery business to our shareholders, execution of inter-company agreements, further due diligence as appropriate, and final approval by the company's board.

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