Kraft: Spin-Off To Spread Shareholder Value

It became official today. Mondelez is now the new name of Kraft Foods (KFT) international division after shareholders unanimously voted to approve the controversial new name over the more conservative obvious choices like Kraft Foods International. Brands that will run under the Mondelez umbrella will include Fig Newton, Oreo, Cadbury, and Trident after the split of the company into two parts becomes official expected to be later this year.

Global kingpin Kraft is a food provider powerhouse with an unrivaled portfolio of valuable brands people recognize and love worldwide. It manufactures, markets and sells packaged foods such as beverages, biscuits, cheese, confectionery, desserts, salad dressings and snacks in approximately 170 countries across the world, from plants and operations in over 80 countries.

Kraft markets and sells its products primarily through vendors including supermarkets, value stores, club stores, and grocery/convenience stores. The major distributor and largest supplier of Kraft products is Wal-Mart (NYSE:WMT). The world's largest retailer accounted for a hefty 12% of its net revenue in 2011.

A compelling statistic is more than 80 percent of revenues come from products that hold the No. 1 share position in their respective categories. Another interesting fact is more than 50 percent of revenue is driven by categories where market share is twice the size of their nearest competitor

Eleven of the company's iconic brands-including Cadbury, Jacobs, Kraft, LU, Maxwell House, Milka, Nabisco, Oreo, Oscar Mayer, Philadelphia and Trident-generate considerable revenue of over a billion dollars annually.

They are also a testament to longevity and staying power as over forty of their beloved brands have been in existence for more than a century. Eighty other brands also contributed more than $100 million each in 2011 indicating a diverse portfolio of products.

Summary of Operations (in millions)
  2010 2009 2008
Net revenues $49,207 $38,754 $40,492
Cost of sales $31,305 $24,819 $27,164
Operating income $5,666 $5,183 $3,576
Operating margin 11.5% 13.4% 8.8%
Dividends $1.16 $1.16 $1.12
Total assets $95,289 $66,714 $63,173
Long-term debt $26,859 $18,024 $18,589
Total debt $28,724 $18,990 $20,251

For 2011, Kraft reported revenue of over $54 billion earning around $3.5 billion, or basically two dollars per share. Revenue increased 10.5% year-over-year due to higher prices, favorable currency effects, and also the Cadbury acquisition. Kraft has produced 12% revenue growth during the past five years. Overall, Kraft has delivered solid revenue and profit growth with single digit net margins.

The company has also grown assets consistently during the past five years utilizing debt to finance its operations. Debt has generally held constant at a ratio of around 30% of total assets. Kraft ended 2011 with $2 billion in cash, down from $2.5 billion in 2010 primarily because it received a $9.4 billion influx of cash in 2010 from new debt issued.

Kraft dividends have grown 2.8% over the past five years from $1.04 per share in 2007 to $1.16 per share in 2009 and held steady in 2010 and 2011. Kraft has maintained a fairly high payout ratio (slightly under 60% on average) given that it also needs capital to expand into new markets. Based on year-end closing stock prices, Kraft's dividend yield has hovered between 3% and 4%, respectively.

Top Institutional Holders (Shares in Millions)
Berkshire Hathaway Inc. 105.2 6.0%
Capital Research Global Investors 97.7 5.6%
State Street Global Advisors 83.9 4.8%
Vanguard Group, Inc. 62.5 3.6%
Capital World Investors 60.3 3.4%
BlackRock Institutional Trust Company, N.A. 55.0 3.1%
Wellington Management Company, LLP 43.2 2.5%
Franklin Mutual Advisers, LLC 35.5 2.0%
Invesco Advisers, Inc. 26.2 1.5%


Kraft announced its intention last summer to split current operations into two distinct entities. The North American entity will retain the Kraft Foods moniker. Shareholders decided today the moniker for its growing international entity will be named Mondelez, meaning "delicious world."

Developing Markets and Europe together saw contributions go up 44% while North America's contribution fell 20%. This growth in Developing Markets and Europe, contrasted with the reduction in earnings contribution from North America, underlies management's decision to split the company. Mondelez will primarily focus on gaining market share in high growth markets and high margin regions.

The North American Business will focus on maintaining market share, improving product mix, maximizing productivity, and improving margins through cost-cutting and other initiatives. The North American Grocery Business will also focus on paying steady dividends to shareholders.


Will this decision to split the company unleash shareholder value? From my perspective the decision appears to be in shareholders best interest because it is based on the reasonably sound logic of revenue and earnings growth in Europe and growing economies versus steady, slower growth in the mature North American market. The breakup could, indeed, unleash shareholder value and Mondelez shares could well outperform without its North America anchor. Another positive potential outcome is shareholders could see capital appreciation and higher overall dividends down the road.

Disclosure: I am long WMT, KFT.

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