The Kraft Divorce

Can someone explain this story to me?

PORTLAND, Oregon — Kraft Foods Inc. said it plans to split into two publicly traded companies, with one focusing on its international snack brands like Trident gum and Oreo cookies and the other on its North American groceries business that includes Maxwell House coffee and Oscar Mayer meats.

The move by the food giant to split a high-growth international business from its domestic grocery brands highlights the increasing focus by U.S. companies on growth in emerging markets.

“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,” Chairman and CEO Irene Rosenfeld said during a conference calls on Thursday.

Kraft said the deal would allow both companies to focus better on their priorities.

That explanation doesn’t satisfy me. Why isn’t spinning off a division enough?

My speculation is that this has more to do with buying and selling stock at a profit than it does with competing more effectively in emerging markets. Or maybe internal politics.

9 comments… add one
  • Icepick Link

    The explanation on the idiot box is that this will produce one company with high dividends but low growth expectations (the North American meat and cheese business), and a high growth low dividend stock (all the snack foods). In other words, you were correct on your buying and selling stock call. There may or may not be some internal politics involved, but that is all about buing and selling stocks at a profit and who has the best plan for that.

    Count Oreos as something else that aren’t as good as they used to be. Perhaps it is the removal of transfats from the recipe?

  • michael reynolds Link

    I heard the EU was planning to charge Kraft with a crime against humanity over the macaroni.

  • I think there must be some generational, regional, or socio-economic thing with Kraft macaroni. I can’t abide the stuff. My California born and raised wife loves it.

  • I heard the EU was planning to charge Kraft with a crime against humanity over the macaroni.

    Oh God, it is going to be one of those days…I agree with Michael.

    The horror…the horror….

    :p

  • I don’t know what they put in it, but my kids would mainline the Kraft stuff if they could.

  • Based on the nutritional analysis about 10% of it is sugar or salt.

  • Drew Link

    Although large corporate is not my game, my knee jerk is that yes, the two businesses are different – in channel, and in growth and cash flow characteristics. That speaks to a divorce.

    Dave queries: why not just sell? As your resident M&A guy, how much you wanna bet the issue is “what is the share price maximizing buyer set that is going to buy a ginormous cash cow at a good price?” I’ll bet Kraft’s grocery brands business is all of $10B, if not mid-teens. And that means the buyer / seller power balance probably lies with the buyer. So just split the two for operational, capital allocation, and management culture reasons and don’t give the asset away. Further, a high dividend paying blue chip large cap stock is the perfect vehicle for so many personal investment vehicles right now that are loaded with fixed income securities for safety but juiced with this type of equities, a little commodity expeosure etc to get some yield. Heh, like my investment vehicle. 8% last year for relatively low beta. Not bad.

  • PD Shaw Link

    Doesn’t a territorial split also have anti-competitive effects? You don’t have to worry about a product division being sold off and being used by a competitor against you.

  • PD Shaw Link

    I should have phrased that differently, selling off a division poses the risk that the buyer will use your product to compete against you or more likely, use it in conjunction with another product or group of goods in competing against you. Territorial division reduces or eliminates such risk and presents future opportunities for licensing and distribution deals between them.

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