Kraft To Divorce Oreos And Easy Mac In Breakup

By: Steve Schaefer

Kraft Foods, the maker of everything from Easy Mac to Oreo cookies, plans tosplit up into two businesses Thursday, and based on the current landscape in the global economy one may be much more attractive than the other.
The packaged foods manufacturer said it will separate its faster-growing global snacks business, the home of brands like Oreo, Cadbury and Trident Gum, from its more U.S.-centric grocery business, which houses Oscar Meyer, Philadelphia cream cheese and Jell-O and other household names.
The ins and outs of the transaction will take more than a year Kraft said, and the company is targeting year-end 2012 to complete the spinoff of the grocery business to shareholders. The first paragraph in Kraft's press release makes it clear why it isn't the other way around (emphasis mine):
Kraft Foods Inc. (NYSE: KFT) today announced that its Board of Directors intends to create two independent public companies: A high-growth global snacks business with estimated revenue (1) of approximately $32 billion and a high-margin North American grocery business with estimated revenue of approximately $16 billion. The company expects to create these companies through a tax-free spin-off of the North American grocery business to Kraft Foods shareholders.
Essentially, Kraft is confirming yet again what market watchers know: growth in the U.S. is slow and getting slower, while emerging markets continue to expand rapidly, albeit with some hiccups along the way. Kraft's iconic brands allow it to garner a price premium in the U.S. market, which can keep its North American grocery business humming even in times of mediocre growth.
That was certainly the case in the second quarter, when net revenue in the U.S. grocery segment grew 5.4% to $973 million despite the slowing economy. While that figure was actually better than the 0.4% decrease in U.S. snacks revenue (to $1.5 billion), it paled in comparison to increases of 26.2% (to $3.5 billion) and 22.3% (to $4 billion) in the company's European and Developing Markets businesses, respectively.
Overall, Kraft reported revenue of 13.9 billion, up 13.3%, and earned 55 cents per share, or 62 cents on an operating basis. More importantly, the food company, which counts billionaires Warren Buffett and Nelson Peltz among its largest shareholders, raised its full-year guidance to earnings of at least $2.25 per share, a nickel higher than its previous forecast and above the consensus estimate.
Investors cheered the earnings and news of the breakup, sending Kraft shares, which had been weak since hitting 2011 highs in early July, up nearly 7% pre-market.