Breaking up became much easier for Kraft to do after its hostile acquisition of Cadbury 18 months ago gave the world’s second-largest food company a snacks business with the scale to stand alone.
Even so, Thursday’s announcement that the company is splitting in two came as a surprise – and one that raises questions about the future of Irene Rosenfeld, Kraft’s chief executive and the architect of the Cadbury deal.
Ms Rosenfeld said on Thursday that she and the board had been considering the split since 2007 when it acquired Danone’s LU cookie business. Rather than being an about-face, the move was a “validation” of the company’s strategy, she said.
“We believe this is the next logical step in realising our vision of being a global snacking powerhouse and unleashing the value of the North American grocery business,” Ms Rosenfeld told the Financial Times.
However, sceptics questioned the timing and logic of the deal after Kraft failed to give details on the growth outlooks for the split companies or how different brands might fare when split from their stablemates.
“I’m not exactly clear why this is occurring,” asked Eric Katzman, analyst at Deutsche Bank. “I mean, if the pieces aren’t going to grow at a faster rate because they are more focused or because the tax rate efficiencies are greater … why do it?”
Other analysts wondered if the decision to split the companies would create “dis-synergies” and what it would mean for Kraft’s vaunted sales force, which uses its grocery and snacking scale to the company’s advantage.
Within the next 12 months, the $48bn Kraft will be split in two publicly traded companies, creating a global snacks business with revenues of $32bn and a $16bn grocery business, focused on North America. Brands such as Cadbury, Oreo, LU and Tang will be separated from Philadelphia cream cheese, Miracle Whip and Oscar Mayer meats.
The move comes as Ms Rosenfeld has been under pressure to drive growth at Kraft after a variety of efforts to rejuvenate the company failed to spur its share price or satisfy investors. Investors lauded the move, sending Kraft’s share price up 5 per cent after the announcement.
Kraft said on Thursday that its second-quarter net earnings rose 3.9 per cent year on year to $976m, or 55 cents a share, as revenues jumped 13.3 per cent to $13.8bn. The company raised its full-year earnings outlook.
Big shareholders, such as Warren Buffett and Nelson Peltz, who recently increased his stake in the company, praised the decision on CNBC.
Sir Roger Carr, who led a staunch defence of Cadbury as head of the confectioner at the time of the takeover, said: “My biggest concern for Cadbury at the time of the acquisition by Kraft was that it would lose momentum as part of a lacklustre low-growth conglomerate. I know that Nelson Peltz has similar views and would probably have made these clear to Irene Rosenfeld since making his recent large investment.”
Andrew Lazar, analyst at Barclays Capital, suggested the split last September, when he wrote a wrote a note to clients arguing that Kraft should pursue a “divide and conquer” strategy if the investment case for the Cadbury deal was not panning out. By splitting the group into a growth company and a yield company, each would have a more focused strategy.
“The creation of two separate, standalone companies out of the current portfolio – one geared to faster-growth snacking categories across the globe, the other more ‘resigned’ to its lower-growth assets but instead focused on taking advantage of their prowess for cash flow generation – would arm each with a more refined ‘reason for being’,” Mr Lazar wrote.
Kraft’s split comes as other food companies are debating the benefits of scale and could trigger similar moves from companies such as the Campbell Soup Company, Heinz and PepsiCo.
Other conglomerates in the sector have so far resisted pressure to split, arguing that economies of scale and synergies – such as consumer insights or dealing with retailers – outweigh the benefits.
Unilever, the Anglo-Dutch maker of Dove shampoo and Lipton tea, came under repeated pressure from investors to separate its household and personal care division from the lower-growth food and beverages operations. However, it is an issue that Paul Polman, chief executive, says seldom comes up with investors now.
“We think there are enough synergies we can drive across the business while leveraging scale and also providing the focus where focus is needed,” he said. Multiples in the two sectors are also more closely aligned, he added.
As for Ms Rosenfeld, she declined to respond directly when asked if she would be running one of the two companies but said she remained fully committed to delivering results in 2011 and 2012. Kraft had a “rich bench” of managers ready to populate the companies.
“I’m not going anywhere,” Ms Rosenfeld added. “I plan to keep a leadership role after the transaction closes.”
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