Aug. 4 (Bloomberg) -- Kraft Foods Inc.’s plan to spin off its North American grocery unit will provide the snack-foods business more flexibility to acquire or divest brands, Chief Executive Officer Irene Rosenfeld said in an interview.
The grocery entity, with about $16 billion in revenue, will include the U.S. beverages, cheese, convenient meals and grocery units and some other food items, Northfield, Illinois-based Kraft said today in a statement. A snacks company, built from the European and developing markets units and the North American snacks and candy businesses, will have $32 billion in sales.
Rosenfeld said today that the split is the “next logical step” in the company’s transformation since she took over in 2006. The move will help Kraft push snack products such as Cadbury chocolates and Oreo cookies into emerging markets while the slower-growing, higher-margin grocery business -- which will keep the Oscar Mayer meats and Maxwell House coffee brands -- expands in the U.S. and returns cash to shareholders.
“We are very focused right now on the creation of two world-class companies,” Rosenfeld said in the telephone interview, adding that the plan couldn’t happen unless both units were strong. “There can be a great deal of value unlocked in the creation of these two companies.”
Kraft, the world’s second-biggest food company, fell 52 cents, or 1.5 percent, to $33.78 at 4 p.m. in New York Stock Exchange composite trading. The shares have gained 7.2 percent this year.
Rosenfeld said the company hasn’t received offers to buy either unit and doesn’t need to sell brands to make the plan work. The units alone can more easily pursue acquisition and divestiture opportunities, Rosenfeld said. She declined to say what role she will take after the spinoff.
“My focus right now is as remaining the CEO and chairman of Kraft Foods and delivering our 2011 and 2012 commitments,” she said. “I’m not going anywhere, and I look forward to playing a leadership role when this transaction closes.”
The tax-free spinoff of the grocery business may be completed by the end of next year, Kraft said. Rosenfeld said she expected no problems getting approval from the U.S. Internal Revenue Service.
Kraft, which bought Cadbury Plc in 2010 for about 13.6 billion pounds ($22.2 billion), said it has “built a global snacking platform and a North American grocery business that now differ in their future strategic priorities, growth profiles and operational focus.”
Warren Buffett, whose Berkshire Hathaway Inc. is Kraft’s biggest shareholder with a 6 percent stake, had previously cut his holding in Kraft after the company bought Cadbury and sold its pizza brands, criticizing the moves as “dumb.”
Buffett said he’s “fine” with Kraft’s spinoff, CNBC reported today, citing an interview. Buffett didn’t immediately respond to a request for comment Bloomberg e-mailed today to his assistant, Carrie Kizer.
Rosenfeld considered such a spinoff in 2007 and determined the snacks business wasn’t large enough to stand alone at the time, according to a person familiar with her thinking. In early 2010, weeks after the Cadbury acquisition, she took up the idea again and decided this year that the business had the necessary scale and international presence to justify a spinoff, said the person, who asked not to be identified because the discussions were private.
Inside Kraft, some executives thought the company was spending too much money to market and advertise its slower growing grocery business, said another person familiar with the matter. Separating grocery would allow it to be run on a cash-flow basis and operate more like H.J. Heinz Co., Campbell Soup Co. and Kellogg Co., with a focus on cutting costs.
“Given the different investment priorities and growth trajectories of the two businesses, it makes a lot of sense to separate them,” Alexia Howard, an analyst with Sanford C. Bernstein & Co. in New York, said today in a note. “The strategic rationale for such a move is strong.”
Kraft follows other consumer-products companies that have split in the past year. Sara Lee Corp., the maker of Ball Park hot dogs and Douwe Egberts coffee, decided to split in two in January after failing to agree to takeover offers from suitors. Fortune Brands Inc., the maker of Jim Beam bourbon and Titleist golf balls, in December said it would become three companies.
Falling in Line
“This falls in line with other consumer-products companies that have split to better leverage their opportunities,” Erin Lash, an analyst with Morningstar Inc. in Chicago, said today in a telephone interview. “It’s interesting for Kraft investors and with the tax-free spinoff they will get the benefit of both companies.”
Lash estimated that the snack business would be valued at a multiple of 13 times earnings before interest, taxes, depreciation and amortization, while the grocery business would be valued at about 8 times Ebitda.
Rosenfeld said that while she didn’t expect a change in the combined long-term growth rates for the two companies, she did expect those rates to be rebalanced. Key to the strategy is that the two units no longer have to compete for money to invest in marketing and distribution, she said on a conference call with analysts after the announcement.
“This is the best way to stage our businesses for long-term success, the best way for shareholders to value each business and the best way to ensure a bright future for our people around the world,” Rosenfeld said.
Separately, Kraft said net income rose 4.2 percent to $976 million, or 55 cents a share, from $937 million, or 53 cents a year earlier. Revenue climbed 13 percent to $13.9 billion, the company said in a statement.
Operating profit per share this year will be $2.20 to $2.25 a share, up from a previous forecast for as much as $2.20, Kraft said.
Kraft said its financial advisers are Centerview Partners, Evercore Partners and Goldman Sachs Group Inc. The company is “targeting capital structures to maintain investment-grade ratings with access to commercial paper for each new entity.”
To contact the editor responsible for this story: Robin Ajello at email@example.com