Kraft's Split Story Continues In 2012

A top business story of 2011 was Kraft's (KFT) announced split into two companies. A general overview of the split is discussed in a previous article. In short, Kraft will be fully split into (1) a North American Foods firm and (2) a Global Snacks firm by late 2012.

The Kraft story line for early 2012 will be the precise details of the split with the specifics to be determined by the second quarter of 2012. The major dividing lines for the global food giant are coming into place, but some open questions remain, according to a Wall Street Journal piece by Julie Jargon and Paul Ziobro.

The WSJ article also offers a few more key facts for investors. The transaction is designed to be tax-free (with IRS approval pending) and the Global Snacks company (projected $31 billion revenue) will edge out the North American Grocery (projected $17 billion revenue) sibling on both a revenue and brand breadth basis.

The current Kraft North America President, Anthony Vernon, a former Johnson and Johnson executive, is set to lead North American Foods and current Kraft CEO, Irene Rosenfeld, will head Global Snacks (which has not officially decided on a name).

Along with personnel, intellectual property, and distribution questions, the key issues in the split will be the divisions of the global brand portfolio. Kraft is a brand behemoth and some potential factors that appear to drive the parceling out of brands include (1) geography and markets served; (2) the type of product (food or snack category); and (3) other factors like product lineage and logistics.

Many brands clearly fall into place: Milka, a leading European chocolate, is clearly in the Global Snack category and American processed meat brand Oscar Mayer is clearly in North American Foods. However, there are some open questions and possibly room for horse trading between the firms, including partnerships and licensing.

Breaking Up The Brands

Kraft's largest brands A-Z can be found on their website. And at the end of this piece is a potential breakdown of the brands investors in each new company may own. Of course, those who buy in now get both companies and a claim on all brands.

In a September, 2011 release, Kraft outlined a North American Foods firm that "will include four 'billion-dollar' brands, including Kraft, Maxwell House, Oscar Mayer and Philadelphia, plus three more with revenues of at least $500 million, and an additional 14 with annual revenues of more than $100 million." The company also envisioned a Global Snacks company with "a powerful brand portfolio featuring eight 'billion-dollar' brands, including Cadbury, Jacobs, LU, Milka, Nabisco, Oreo, Tang and Trident. Its portfolio will include six additional brands with revenues of more than $500 million, and nearly 40 more brands with over $100 million in sales."

5 Possible Open Questions

1) A Literal Product Mix:

Kraft's most successful global brands now present some complex questions in the upcoming split. Consider, for example, the Bloomberg Businessweek piece on Philadelphia Cream Cheese (Dec. 12-16, 2011, p. 32-33). The $1.7 billion spread is a global category leader, and Kraft has leveraged the name recognition to create new flavors and variations (a familiar theme across the brand portfolio).

In one new variation, Kraft has mixed its leading Milka chocolate (slated to be owned by Global Snacks) and its iconic Philadelphia Cream Cheese (slated to be owned by North American Foods) to create a new and popular spread aimed at Ferrero's Nutella. So the two future companies' products are literally and symbolically swirled, creating some need for future collaboration.

2) Guarantees of Collaboration:

A wide range of mechanisms could help ensure collaboration between the two firms after the split: licensing, partnerships, joint ventures, and agreements regarding distribution, R&D, etc.. Such mutually beneficial agreements are a good start. Plus, each firm will likely have some de facto shared equity stakes with all shareholders (including insiders and employees) becoming owners in both firms. Major holder -- like Berkshire Hathaway -- will have vested interests in the success of both firms and will likely vote their shares accordingly.

Both new companies will want to retain Kraft's current strengths such as its leverage with retailers and synergy (i.e., ability to build recipes entirely of Kraft products) while pursuing their unique strategies. Natural points of cooperation might be distribution in convenience stores and at the point of purchase, a area likely covered by gum/candy leader Global Snacks but also beneficial for North American Foods, for example, with it Planters line and even other convenience size portions of its foods and juices.

3) The Cookie Doesn't Crumble:

Kraft's Nabisco includes the biggest names in cookies and crackers and is set to go entirely to Global Snacks according to both the Wall Street Journal article and Advertising Age. Nabisco products alone occupy almost an entire aisle in my local Wal-Mart (NYSE:WMT). And it looks like the indulgent Oreos and Chips Ahoy will stay coupled with their more health-conscious cousins -- Wheat Thins and Triscuits.

Others major products areas could see divisions -- such as Kraft's beverages segment. The coffee brands will be split by markets (see list below), with Maxwell House going to the North American firm and the brands popular on other continents going to Global Snacks. Some unique divisions seems to suggest themselves or could be negotiated: Tang (a billion dollar brand popular in 30 countries) appears slated for Global Snacks as powdered drinks lend themselves to no refrigeration and easy distribution common in emerging markets. A similar theme may be in the works for Kool Aid, and Crystal Light may follow suit.

4) Balancing Act:

Global snacks will emerge #1 position globally in biscuits (cookies/crackers) chocolate, gum, and candy with much higher revenues than its North American Foods counterpart. However, revenues and sheer brand numbers aren't the only factors for producing an equitable split that sets each firm on a course for success.

The balance sheets of each firm may also be an area for generating equity in the division. Global Foods, for example, is getting all of the benefits of the recent Cadbury acquisition, so it should probably shoulder more of the burdens, such as the associated long term debt, from that transaction. North American Foods should have a stronger balance sheet with less debt to allow for a stronger dividend (an announced feature of the split). Both Kraft's selling of food brands (Pizza, Cereal, etc) and its acquisition of Cadbury suggest the offspring should inherit the cash from those transactions.

Another arena for equity and cooperation is the shared use of the Tassimo hot beverage system. While global Snacks has a plethora of coffee and chocolate brands for the system, North American Foods could also use it for both Maxwell House, and General Foods (for flavored coffees). This platform will allow North American Foods to more widely distribute its Maxwell House (#2 in the US but also popular in the UK, Mid East, and Asia) to a wider audience and also allow Global Snacks to deliver its extensive gourmet coffee lines across the planet. The link between the Tassimo brewing system and the numerous coffee (and chocolate) brands is ideal. So again global Foods provides the hot chocolate and North American Foods the leading (Jet Puffed) marshmellows.

5) Unique Traits To Look for in the Kraft Offspring Going Forward

BRICs Play: Global Snacks is the clear play on the BRIC countries with leading brands in Brazil, Russia, India, and China, but it also has a moderating European presence, a normally stable economic zone (but shaky at present). North America Foods gets a stable US consumer and developed distribution but loses the growth and unique incubator capacity of emerging markets, ideal places to test new product variations.

Commodity Risk: Global Snacks will be heavily influenced by the prices of coffee, cocoa, and sugar; the prices for dairy products could impact North American Foods.

Dividend Dandy: Kraft currently has the tenth highest yield -- 3.11% -- in the Dow. While one or both may drop off the Dow, North American Foods will inherit the steady dividend gene from its parent firm.

The Brand Breakdown: Possible division of the products based on current information could be as follows:

North American Foods Brands

A-1, Breakstones/Knudsen, Capri Sun, Crystal Light, Cheese Whiz, Cracker Barrel, Cool Whip, Jello, Kraft (Mac & Cheese, Cheeses, Dressing, etc.), Oscar Mayer, Maxwell House, Miracle Whip, Philadelphia Cream Cheese, Planters, Stove Top, Velveeta.

Global Snacks Brands (with brief, general description):

Alpen Gold, (leading Russian chocolate); Cadbury (global chocolate brands -- Dairy Milk, Flake & Creme Eggs); Carte Noire (leading French Coffee); Club Social (#1 cracker in Brazil, popular in Latin America); Cote d' or (premium chocolate in Europe & Middle East); Dentyne (U.S. gum but fits snack profile); Gevalia (Swedish Coffee/Tea); Green & Black (leading UK Chocolate); Halls ( a candy in the southern hemisphere but a cough drop in northern hemisphere with 50% of global category sales); Hollywood Gum (France's leading gum); Jacobs (billion global dollar coffee brand, leader in 7 countries); Kenco (UK's leading coffee); Lacta/Bis/Sonho de Valsa (#1 chocolate in Brazil, also popular in Italy); Lu (French cookie brand available in many countries and includes several international brands); Marabou (chocolate regional brand strong in Scandinavian countries); Milka (billion dollar brand, leading European chocolate); Nabisco (Oreo, Wheat Thins, Triscuit, Ritz, etc); Onko (German Coffee); Prince (Cookie brand strong in 8 countries); Royal (Latin America baking powder and instant desserts) ; Simmenthal (canned meat spread in Italy); Stimoral (leading gum in Northern Europe); Toblerone (iconic traingular chocolate with global presence); Trident (#1 global gum); Vegemite (leading Australia spread).

Disclosure: I am long KFT.

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