The recent announcement of Kraft's split into two firms creates a range of issues for investors to consider. Kraft is the number one food firm in the U.S. and second globally to Nestle (OTCPK:NSRGY). It also has one of the most complex corporate histories of any firm.
Many of its iconic brands were central in the epic tale of LBO intrigue detailed in the book and film: "Barbarians at the Gate"). An earlier piece takes the initial bite of the split, and this article continues to chew on the strategic implications for investors. The story will continue to develop and no doubt be one of the biggest business headlines of the year.
Despite its long and rich history, Kraft broke away fully from Altria ownership in 2008. Today, Kraft stands alone and with a very strong portfolio of brands that lends itself to a split along geographic and strategic lines, particularly with recent acquisitions.
Corporations splitting in two has become a common theme with Conoco Phillips (NYSE:COP), Marathon (NYSE:MRO)(NYSE:MPC), Ralcorp Holdings (NYSE:RAH), all businesses that have fairly distinct segments that divide easily (think refining/marketing from production/exploration or brand name from generic) in a way that can add value for shareholders. Each new entity can focus more clearly on Jim Collins' "hedgehog concept" (from Good to Great) without dispersing its resources. The dividing lines are fairly clear in the Kraft transaction, giving each new firm a laser-like strategic focus.
First, Kraft is taking the slow but steady North American brands (e.g., Maxwell House, Jello, Miracle Whip, Kraft Mac & Cheese, Oscar Mayer, Kraft Dressing, Philadelphia Cream Cheese, etc.) and placing it into one unit -- North American Grocery -- a future company I'll dub K-NAG (North American Grocery). This firm is very likely to offer single digit revenue growth (3-6%) but pay a dividend the company states will be "competitive" -- likely a 3-4% yield, within the high range for a packaged food firm with strong brands and high margins. Early estimates for K-NAG are revenues at $16 billion. It will remain a force in the North American food market.
Second, Kraft will segregate its global and snack brands (e.g., Oreo, Nabisco, Cadbury, Trident, Tang, Lu Biscuit, etc.) and form a company focusing on international and emerging markets, a future firm I'll call K-Globals (Kraft Global & Snacks). K-Globals will have 32 billion in revenue, 3/4 of that from international sales. Estimates are 40% of revenues will directly from emerging markets. This firm will be the global leader in snacks, but don't look for a dividend as K-Globals will be building the brands in new markets and adapting them in innovative ways (think Green Tea flavored Oreos--among the most popular China); however, emerging markets could power revenue growth for K-Globals into high single digits and upwards (7-9%).
The split makes strategic sense, allowing each new firm to pursue its mutually exclusive goals. A point of purchase example highlights the vast diversity in the current business. Think about the sale of Cheese Whiz at the Wal-mart (NYSE:WMT) in Des Moines as opposed to the sale of a Cadbury bar from a small vendor outside Mumbai. We see very different supply chains, strategy, and pricing. While Kraft sells 14% of its products through Wal-mart's state of the art supply chain, its Cadbury acquisition uses India's fractured marketing channels and thousands of small stores. The strategy may be to make a competitive margin from brand loyalty in Iowa while in India the goal may be to reach the several hundred million people in India who may not have even tried chocolate. Very different ends requiring very different means.
Some brands may not fit as neatly into one category (grocery or snack/global) and Kraft will want to be sure and make the separation amicable with existing partnerships intact where products synergy exists (think: Jello Pudding with Nilla Wafers and Cool Whip or a s'more with Honey Grahams with Kraft Jet-Puffed marshmallow and Cadbury Chocolate). Some of the separation could literally get sticky. K-NAG could also use a premium coffee (like Gevalia) since Kraft lost the Starbucks retail business. And a product like Lunchables can contain Kraft cracker, cheese, meat and a snack. So not all brands will divide cleanly between the two new firms.
With its brand leadership it is not a surprise Kraft has turned its customer focus to the consumer of its shares, offering distinct products for investors who may have different goals (income and stability in North American Markets versus fast growth in emerging markets). You can see the Kraft family of brands from A-Z, A-1 Steak Sauce to Vegemite Spread, here) and begin to see how custody of the brands might be parceled out to each new company.
The 2010 Annual Report is replete with incremental social, nutritional and environmental improvements regarding the health aspects or social cause associated with the product, something both firms can take in their DNA. K-NAG and its food segment may be best poised to offer increasing health gains (lower sodium, higher fiber, vitamins) and the K-Globals can focus on sustainability and fair trade.
Kraft is a story of brands, so it is no surprise the ultimate goal is to rebrand itself into two distinct firms with different goals and consumers. Possible candidates to lead the K-NAG charge could be current CEO Irene Rosenfeld (an Ivy League PhD with solid Kraft and Pepsico credentials) and possibly look for an up and comer from the European, Latin American or Asian leadership stable as a potential K-Globals head.
For investors K-Globals may be better for a Roth or brokerage for a long term realized or unrealized capital gains, respectively, and K-NAG could be a dividend play in tax-deferred accounts or work as an income stock.
More broadly, the Kraft, Conoco, Marathon and Ralcorp divisions may prompt investors to look for companies with potential dividing lines where the parts or brands alone, or in two distinct groups, may be worth more than the whole. One ponders how such divisions among Proctor and Gamble's (NYSE:PG) fabric care, personal care, and other categories (Gillette, Pampers, Duracell, Tide) would serve investors, for example.
Investors will have a few months to snack on the precise details and information regarding the Kraft split--Goldman Sachs (NYSE:GS) will be advising -- and position themselves for both a tasty global snack leader and a North American packaged food standby.