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Kraft to split into two companies

One will focus on snacks; the other on groceries. The snacks business could have revenue of $32 billion, about twice what the grocery business will pull in.

August 04, 2011|By Emily Bryson York
  • A shopper selects Oreo cookies by Nabisco -- part of the Kraft Foods Inc. family of brands -- at a Ralphs Fresh Fare supermarket in Los Angeles.
A shopper selects Oreo cookies by Nabisco -- part of the Kraft Foods Inc.… (Associated Press )

NORTHFIELD, Ill. — Just 18 months after acquiring Cadbury, Kraft Foods is breaking up.

The Northfield, Ill.-based conglomerate, the world's second-largest food company, said it will divide itself into two publicly-traded companies next year: a $16 billion North American grocery business, and a $32 billion global snacking business. Both companies are expected to be based in Chicago.

The division would establish Kraft's North American grocery business as a separate company, with brands like Kraft Macaroni & Cheese, Philadelphia Cream Cheese, Maxwell House coffee and Oscar Mayer hot dogs and meats. Kraft's North American snacking business, European and international divisions will comprise the balance, taking brands like Oreo, Tang, Trident, Cadbury Dairy Milk and Jacobs coffee.

Dividing the companies allows Kraft to shed its low margin, slow-growing grocery business, and focus on faster-growing, higher-margin gum, candy and snacking brands and build business in developing markets.

In a call with investors Thursday morning, Kraft chairman and CEO Irene Rosenfeld said the board-approved plan had been under consideration for years.

She said each company should benefit from standing on its own, with appropriate growth targets.

"As we acquired Lu Biscuits and as we acquired Cadbury and began to put these businesses together and look at strategic priorities, it was clear we had very different businesses and portfolios," she said. "We believe value could be created if they were free to pursue their own strategic priorities."

Kraft management said that it's too early to provide earnings guidance for the two companies after what's expected to be a tax-free spin-off in approximately 12 months.

The company has about $29 billion in outstanding debt. Executives said it's too soon to say how it will be divided but that it will be done in a way that preserves each company's investment-grade status.

Rosenfeld said it's also too soon to say who will run the North American company. She said Kraft has "an incredibly talented management team" and a "deep bench from which to populate these companies."

The move comes as more companies, including Wal-Mart Stores Inc., Target Corp. and various dollar stores, are increasing their grocery sections to capitalize on consumers' one-stop shopping needs.

Kraft said its plan to for a tax-free spinoff of the grocery business to shareholders will take some time, estimating that it will need a year or more to work on structure, management and other issues related to the split. Taking that into account, the company's current plan is for the split to be complete by the end of next year.

Aside from the spinoff plans, Kraft also announced that its second-quarter earnings climbed 4 percent to $976 million, or 55 cents per share, from $937 million, or 53 cents per share, a year ago. Revenue rose 13 percent to $13.88 billion from $12.25 billion. Analysts polled by FactSet predicted earnings of 58 cents per share on revenue of $13.08 billion.

Kraft also boosted its full-year forecasts for revenue from existing businesses and operating earnings. Kraft now anticipates so-called organic revenue to climb at least 5 percent, with operating earnings of at least $2.25 per share. Its prior guidance called for revenue to increase at least 4 percent, with operating earnings of at least $2.20 per share. Analysts expect earnings of $2.23 per share.

eyork@tribune.com | Twitter: @emilyyork

-- The Associated Press contributed to this report

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