Kraft Foods Inc. has joined a growing list of companies splitting themselves up as the slumping economy and an increasingly nasty stock market prompt businesses to scramble for ways to unlock shareholder value.
On a day when the Dow Jones industrial average plunged 512.76 points, Kraft was the only Dow component to keep its head above water for most of the session, underlining investor hopes that the breakup of the world’s second-largest food company will produce better results than if all of Kraft’s iconic brands were to stay under one roof.
Kraft – whose products include Oreo cookies, Philadelphia cream cheese and Oscar Mayer deli meats – plans to spin off its slow-growing North American grocery business into a separate company. That would free up the faster-growing snacks and candy division – including chocolate maker Cadbury, which it acquired 18 months ago for about $22.2-billion (U.S.) – to aggressively pursue sales in emerging markets.
“Given the different investment priorities and growth trajectories of the two businesses, it makes a lot of sense to separate them,” Alexia Howard, an analyst with Sanford C. Bernstein & Co., said in a note.
“The strategic rationale for such a move is strong.”
“You see more of that type of activity in downturns because that’s when people have to rethink what they have done over the past several years … and that’s when they start dismantling empires,” said Pavel Begun, a partner with 3G Capital Management in Toronto and former Sara Lee shareholder.
One goal of spin-offs is to free management to take more entrepreneurial risks, rather than being shackled by the corporate parent. Mr. Begun cites the example of Chipotle Mexican Grill Inc. CMG-N whose shares have soared 1,300 per cent since it was spun off from McDonald’s Corp. MCD-N in 2006.
But the strategy doesn’t always work. In 1999, General Motors Co. GM-N spun off auto parts maker Delphi Automotive Systems as a separate company, but within six years Delphi filed for Chapter 11 bankruptcy protection. Four years later, GM followed it into bankruptcy court.
“If you have two bad businesses to begin with, whether you split them up or not, they’re not going to do well,” Mr. Begun said.
“When you have two businesses that are genetically good but are not performing well because they’re shackled by a marriage that does not make sense … then a split-up is going to work very well.”
In Kraft’s case, the grocery and snacks units – with revenues of about $16-billion and $32-billion, respectively – will no longer have to compete for funds to invest in distribution and marketing, chief executive officer Irene Rosenfeld said on a conference call with analysts.
“This is the best way to stage our businesses for long-term success, the best way for shareholders to value each business and the best way to ensure a bright future for our people around the world,” she said.
The spin-off of the grocery business may be completed by the end of 2012, Kraft said. Separately, the company said second-quarter profit rose 4.2 per cent to $976-million, or 55 cents a share, and raised its full-year outlook. The shares fell 1.5 per cent to close at $33.78 on the New York Stock Exchange.
While it’s far too early to say whether Kraft’s break-up will produce the desired result, one thing seems fairly clear: Given the weak stock market, Kraft won’t be the last company to split itself into pieces.
