Kraft Foods En Route to Split

Zacks Equity Research
April 5, 2012

Kraft Foods Inc.(MDLZ) recently announced that it has filed a regulatory statement with the US Securities & Exchange Commission as part of the process to establish its North American grocery business as a new, stand-alone company. The company filed the initial Form 10 Registration Statement after the planned spin-off of the Global snacks business from the current consolidated entity.

Last August, Kraft Foods had announced that it will separate into two independent public companies: a high-growth global snacks business and a high-margin North American grocery business. Global snacks will consist of the current Kraft Foods Europe and Developing Markets units as well as the North American snacks and confectionery businesses. The North American grocery business would consist of the current US Beverages, Cheese, Convenient Meals and Grocery segments and the non-snack categories in Canada and Food Service. The spin-off is expected to be completed before the end of this year.

Following the spin-off, the North American grocery business, which includes popular brands like Oscar Mayer meat and Kraft cheese, will be an independent, public company and will be called Kraft Foods Group. This unit contributed revenues of $18.7 billion in 2011.  Additionally, the North American grocery business will consist of more than 20 brands with annual net revenues of between $100 million and $1 billion each.

Last month, Kraft Foods announced that it will name Global Snacks unit as Mondelez International, Inc. The board of directors has already approved the new name and it will be submitted for shareholder approval at the annual meeting to be held in May 2012. Once the name is approved, the snack company will trade under the symbol of “MDLZ”.

Our Recommendation

We currently have a Neutral recommendation on Kraft Foods. The stock carries a Zacks #3 Rank (a short-term ‘Hold’ rating).

Overall, we are encouraged by Kraft’s strategy of continued cost management, price increases, expansion into emerging markets and continued strong momentum from its designated Power Brands. Further, the split of its North American business is expected to allow Kraft to focus on its distinct strategic priorities and allocate resources optimally. However, we remain concerned about rising input costs and vulnerability to currency translations.

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