Kraft Foods to split into 2 companies

August 4, 2011 6:05:09 PM PDT
Kraft Foods Inc. said Thursday it plans to split into two publicly traded companies, with one focusing on its international snack brands like Trident gum and Cadbury chocolates and the other on its North American grocery business that includes Maxwell House coffee and Oscar Mayer meats.

The Northfield-based food manufacturer will keep the headquarters of the new companies in the Chicago area but the company has not given details about operations or staffing. There seems to be more optimism in the business community about a big company splitting to focus on different markets then a merger where consolidation could lead to layoffs.

The move surprised industry watchers because Kraft, the nation's largest food maker, had long touted its scale and reach as its strength. Kraft officials said Thursday that after several years of acquisitions, sales and other changes, it became clear that the company had built two "strong, but distinct, portfolios" and the next step is to recognize the separate priorities for each.

"Simply put, we have now reached a stage in our development with a global snacks and grocery businesses in North America in which each benefit from standing on their own and focusing on their unique drivers of success," Kraft CEO Irene Rosenfeld told investors Thursday during a conference call.

Kraft's new global snacks company is expected to be a high growth opportunity for investors. The second company will focus on Kraft's grocery business items -- like Mac and Cheese and Miracle Whip -- in North America.

"That may lead to more innovation in the category to identify the needs of the consumers," said Arturo Angel, retail analyst with Leo J. Shapiro and Associates. He says separating the companies allows for more responsiveness to North American customers and adds snacks in emerging markets.

"Especially in Asia and Latin America, where we see a lot of the trends we saw in the U.S. 20 to 30 years ago, people are moving to more urban areas. There's less time to spend at home, so food-on-the-go becomes much more of a necessity," Angel said.

The split may be good news during this time of high unemployment. Outplacement specialist John Challenger with Challenger Gray & Christmas says a big company split like Kraft can create new, well-paying jobs.

"Now they are going to create a duplicate headquarters so it actually might mean good skilled corporate jobs are being added as a result," Challenger said.

In the Chicago area, nearly 5,000 people are employed by Kraft at places such as the bakeries on South Kedzie in Chicago and in Naperville; the Claussen Pickle plant in Woodstock; two business offices out of Glenview; and the company's headquarters in Northfield.

News of the company's plans to bring products into other markets is encouraging for some employees.

"If that's what they want to do, I'm for 'em. As long as they take care of us and keep us in a job. I would love that," Viola Shine said.

"I'm hopeful there will be more growth opportunity so everybody can get a job," Amanda Jeffries said.

Rockford has the only plant to make some the of companies gum brands. Rockford's gums and the snacks coming from the Chicago plant are to be part of the global snack company.

Kraft's business strategy similar to other companies
Kraft is not the first company to switch to the less-is-more strategy. Fortune Brands Inc. announced late last year that it was splitting into three companies, keeping its liquor business led by Jim Beam bourbon, while shedding units that make Titleist golf balls, Moen faucets and Master Locks. Ralcorp Holdings Inc. said last month that it plans to spin off cereal maker Post Foods to focus on building its generic foods business.

And Sara Lee announced in January that it would split its business into two units by 2012, with one focused on coffee and the other largely focused on meat. The move was expected as the company had been selling off business units for years and slowly transforming itself from a purveyor of everything from underwear to cheesecake into a narrower business concentrated on food.

Kraft's decision, by contrast, was unexpected. Kraft's surprise news sent Kraft stock up $1, or 3 percent, to $35.

While investors reacted well to the news, analysts were skeptical about the strategy and as to whether the deal, when fully formed, will provide shareholder value. Some analysts question the split of what they see as overlapping businesses. Additionally, because the companies will both each remain large businesses after the split, they aren't small enough to be attractive acquisition targets like some of the businesses other companies created in their splits.

"We are surprised," said Morningstar analyst Matt Arnold. "It's definitely a change in philosophy; they used to say, 'We will win with scale.' It's tough to say if there is pressure from investors."

The deal is expected to take at least a year or more to complete as it works on the structure, management and other issues related to the tax-free spinoff. Taking that into account, the company's current plan is for the split will be complete by the end of 2012. The new company names are not yet decided.

Kraft on Thursday also announced that its second-quarter earnings climbed 4 percent to $976 million, or 55 cents per share, from $937 million, or 53 cents per share, a year ago. Revenue rose 13 percent to $13.88 billion from $12.25 billion. Analysts polled by FactSet predicted earnings of 58 cents per share on revenue of $13.08 billion.

Kraft also boosted its full-year forecasts for revenue from existing businesses and operating earnings. Kraft now anticipates so-called organic revenue to climb at least 5 percent, with operating earnings of at least $2.25 per share. Its prior guidance called for revenue to increase at least 4 percent, with operating earnings of at least $2.20 per share. Analysts expect earnings of $2.23 per share.

The Associated Press contributed to this report.

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