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Kraft Foods could consider an attempt at divesting its cheese business if growth efforts fail, a move that makes sense for the world’s second-largest food company, sources said.
Kraft has long been associated with cheese products, and according to company filings, its North American cheese and food unit comprises more than 18% of its total business.
Those are among factors, along with what is perceived as potential challenges in selling the unit, that has led Kraft to attempt to retain and grow the business, the two sources close to the company said.
However, those same sources said that if Kraft could not show significant increased growth and associated profit, it could consider an attempt to divest the business.
Kraft activist investor Nelson Peltz is keen to see Kraft make a number of disposals, including cheese, according to a recent CNBC report.
The sources, noting that Kraft has previously considered its cheese business as core, said Kraft is attempting to in some measure re-brand some of its cheese products to capture more of the USD 14bn market by, for instance, stressing that its natural chunks are snack cheeses.
The sources said Kraft was hoping for 13% growth in its premium cheeses.
Two other people, a shareholder and an analyst, said a Kraft divestiture of its cheese business makes sense for the Illinois-based company, as it is a commodity business. That, however, is also a factor that each said could make finding a buyer at a good price more difficult. The North American cheese division had 2006 net revenues of USD 6.08bn, versus 2005 revenues of USD 6.24bn and 2004 revenues of USD 6.02bn, and operating income of USD 886m, USD 921m, and USD 793m, respectively, according to its latest 10K.
The shareholder said Kraft’s cheese business has had a negative impact on the NYSE-listed company’s share price, with the analyst noting that higher distribution costs associated with cheese, including requiring the use of refrigerated trucks, impacts margins.
The source close to the company said that cheese may not have as big future growth potential as other products in the non-North American and emerging markets unit, and that Kraft is looking at overall future growth for the company.
Were Kraft to attempt to divest its cheese business, one issue, according to the analyst, is whether the company would be willing to allow the cheese business to continue to bear the Kraft brand name.
Because a potential purchaser may want to use the Kraft name to associate with the products, and due to what the analyst said could be difficulty in finding a buyer should Kraft seek to divest, the analyst said Kraft could consider a spin-off of its cheese and food unit.
Kraft is unlikely to sell the cheese business because it is too closely tied to the company’s brand, said an industry banker.
The source close to the company agreed as to the challenges that could be associated with any potential sale, but said that a spin-off had not been given much consideration and that even with the size of the business, may likely not stand on its own.
The analyst said that while Texas-based Dean Foods would likely be an interested purchaser of Kraft’s cheese business, Dean, with a market capitalization of approximately USD 4.1bn, would likely be too small to be a purchaser.
The shareholder raised the possibility of a private equity purchase, though the analyst said that while private equity could be potentially interested, such a purchase presented some difficult issues even for private equity.
The sources close to the company agreed with the shareholder and analyst, but did mention Nebraska-based ConAgra Foods as a possible potential purchaser though they said they had no knowledge of the possibility of such interest.
ConAgra has a market capitalization of approximately USD 13.6bn, and already produces refrigerated and shelf-stable temperature class food, but the sources said that such a move into cheese would be very big move for ConAgram and not known to be likely.
When asked if Kraft would consider selling some cheese and dairy brands but not the entirety of the unit if that could produce potential buyers, the sources said that option could not be ruled out.
Among Kraft cheese and dairy product lines are: Kraft and Cracker Barrel natural cheeses; Philadelphia cream cheese; Kraft, Velveeta, and Cheez Whiz process cheeses; Kraft grated cheeses; Polly-O cheese; Deli Deluxe process cheese slices; and Knudsen and Breakstone’s cottage cheese and sour cream.
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