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Kraft Split to Double Its Opportunities

Posted by Dale Buss on August 4, 2011 05:00 PM

Kraft Foods CEO Irene Rosenfeld plans to accelerate her transformation of the mainstream-foods giant, which boasts 61 brands today, by spinning off its North American grocery unit, a move that she anticipates will free both that business and the remaining snacks business to do better what they do best.

According to the company's announcement, Kraft's grocery entity, with about $16 billion in annual sales, will include the U.S. units handling many of Kraft’s most venerable brands including Jell-O desserts, meats under the Oscar Mayer brand, cheese, convenient meals and other food items that are slower-growing but higher-margin businesses. Those established units, Rosenfeld said, can be counted on to continue to return cash to shareholders.

The other side of the operation, a snacks company that represents about $32 billion in annual revenues, will be built from European and developing-markets units as well as the North American snacks and candies business. This will be the more dynamic of the two large concerns as it pushes Kraft snack products such as Cadbury chocolates and Oreo cookies into emerging markets.

“We are very focused right now on the creation of two world-class companies,” Rosenfeld commented to Bloomberg. “There can be a great deal of value unlocked.”

The company stated that the two businesses – “a global snacking platform and a North American grocery business” – now “differ in their future strategic priorities, growth profiles and operational focus.” Warren Buffett blessed the move on CNBC today, saying he's "fine" with the split, and the spinoff will be tax-free to his holdings and to other investors.

“Given the different investment priorities and growth trajectories of the two businesses, it makes a lot of sense to separate them,” Sanford C. Bernstein analyst Alexia Howard said today in a note. “The strategic rationale for such a move is strong.”

Other consumer-products companies lately have split themselves up, including Sara Lee and Fortune Brands. Pressures in its business today — such as commodity-cost increases and the relentless need to bring forth more “better-for-you” — will persist for both entities that Kraft will create.

But Rosenfeld is betting that, for the broader good of the company, its shareholders, employees and brands, there’s a better chance of conquering these obstacles by dividing in order to unlock investor value and brand value. With a nod to Kraft's corporate slogan of "Make Today Delicious," she's clearly determined to make tomorrow even tastier — even as she divides the menu into two portions.

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