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If you are unfamiliar with spin-offs, you are not the only one. Spin-offs fall into the category of special situations investingand is one area that value investors can profit from by taking advantage of temporary market mispricing.

What is a Spin-off?

To quickly bring you up to speed, spin-offs are where a company separates a subsidiary or business division into a new company. A spin off usually occurs because the company wants the public to fully recognize the underlying assets of the division and to get a better valuation of the whole company.

The newly created company is then valued by the market independently. That last sentence is why people invest in spin-offs. To purchase a child company before the market comes around to understanding the full value.

Read this prior article if you want a more detailed discussion of spin-offs. With that introduction on spin-offs out of the way, here is a guest submission on Kraft Foods’ October 1 spin-off.

Spin-Off Opportunity with Kraft Foods Group?

Kraft Food Inc. (KRFT) operates one of the largest food and beverage companies in the world. They manufacture and market food and beverage products, including “TV dinners”, beverages and coffee, cheese and other grocery products, primarily in the United States and Canada.

On, October 1, 2012, Kraft Foods Inc. will split off its North American segments. The North American grocery business will then trade under the name “Kraft Foods Group Inc.” and will have a new ticker symbol of “KRFT.” Kraft Foods Inc. will then change its name to Mondelez International.

The old “KFT” ticker will be retired and replaced with “MDLZ.”

The company will distribute one share of the new KRFT for every three shares of KFT. Fractional shares will be sold and the cash will be sent to you.

Why Are They Separating?

Management believes:

The Spin-Off will allow each company to focus on its distinct growth profile, product categories, distribution systems and strategic priorities, with customized cultures, organizational structures, operating models and financial targets that best fit its own business, markets and unique opportunities.

The Spin-Off will allow each company to allocate resources and deploy capital in a manner consistent with its distinct operational focus and strategic priorities in order to optimize total returns to shareholders.

The Spin-Off will allow each company to allocate resources and deploy capital in a manner consistent with its distinct operational focus and strategic priorities in order to optimize total returns to shareholders.

In layman’s terms the Mondelez branch will likely grow at a faster rate than the North American branch. The Kraft Food group (from here on referred to as KRFT) will retain the Kraft name, which I believe will help keep the revenues stable.

Keep in mind that groceries are bought in weekly intervals, and snacks and candy, are bought at irregular and intermittent intervals. They are two different companies with two different business models, going in different directions.

Will Insiders Want the Stock?

Simply put the KRFT isn’t going to be a small company, only smaller compared to Mondelez International. The directors are not being attached to a sinking ship; they are getting the keys to a new yacht to which they will be able to unleash all of their entrepreneurial energy.

Another point, the new CEO, W. Anthony Vernon, will have a base salary that is relatively small compared to Kraft peers, which include the likes of Pepsi (PEP), and Cola-Cola (KO).

(click to enlarge)

In our case, the more options the better, as far as the directions and executive officers go:

The signs point toward the “insiders” and the shareholders values being aligned together.

Will Institutions Want the Company?

This is the part that gets tricky. A lot of the time after spin-offs, institutions don’t want or can’t hold on to the spin-off. In the case of KRFT, and MDLZ they are both going to be pretty large companies (18.b and 32.b) so the big institutions may not be selling off their stack like we would like in this case.

However, as of the 24th, of September KFT, is no longer in the DOW average, so indexes that track the DOW are going to be forced to sell of their KFT shares. I want to say that institutions will sell the spin-off, but signs are pointing in the other direction.

Summary

As a spin-off, KRFT is looking like a rather plain, big non-distressed company that grosses a little bit over $18 billion a year. Because of the size of the spin-off and its parent, there are a lot of eyes on this situation.

As a spin-off, this company may be on the pass list just because it may be fairly valued right out of the gate. However, while both companies are not exactly what I look for in a spin-off (I like less coverage, but doesn’t every value investor?) they both have the makings for a fine Buffet style buy and hold investment.

Both have very diverse lines of products, both will be paying very good dividends, and both are fairly easy to understand. If (and that’s a big if) a big sell-off happens by the institutions you may be looking at a pretty simple and cheap stock.

Source: Spin-Off Opportunity With Kraft Foods Group?