Logical Kraft slim-down aims to fatten world

August 4, 2011

By Rob Cox
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

With America now sufficiently obese, Kraft Foods’ aim is to fatten the world. At least that’s one facetious way to explain the Oreos-to-Cheez Whiz conglomerate’s plan to split into a growth-challenged American grocery business with $16 bln of sales and an oddly named “global snacking platform” that’s twice as large. Though the deal partly contradicts the scale argument for last year’s takeover of Cadbury, it’s a sensible move.

Still, the volte-face on the part of Irene Rosenfeld, the Kraft chief executive, is surprising so soon after paying $20 billion for Cadbury over the objections of her biggest shareholder, Warren Buffett. That’s especially true given that Kraft’s stock market performance since then has arguably vindicated that deal, clinched in January 2010. Before Thursday’s breakup announcement, Kraft shares had gained 15 percent since then, besting primary rivals Pepsi, General Mills and ConAgra.

But the stock market offers other clues as to why splitting Kraft up makes sense. Two peers whose stocks have gained more are Sara Lee and Hershey — both are up nearly 60 percent in the past 18 months. Sara Lee investors have welcomed the company’s breakup, while Hershey is narrowly focused on confectionery. Rosenfeld is looking for both kinds of appreciation from the market.

Kraft investors liked the financial engineering enough to add $2 billion to the company’s value on Thursday morning. In a year or so, they will get shares in two companies. The smaller one will cram old-school brands like Oscar Mayer meats and Philadelphia cream cheese down the gullets of North Americans. That business should generate lots of cash to pay off a disproportionate share of Kraft’s debt and send dividends to shareholders.

The other one, a sandwich of Cadbury sweets and Nabisco cookies, will have $32 billion of sales, three-quarters outside the United States. The precise financial contours of the two groups won’t be clear for some time. But Kraft’s second-quarter results hinted at the split’s rationale. Developing markets posted organic sales growth of 13.5 percent, powered by higher volumes. North America’s 4 percent increase came purely from higher prices.

Of course, Kraft is the same business it was a day ago. But breaking it into pieces to suit different tastes stands a good chance of enticing investors to pay more for it.

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