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Tax Free Spin-Off of Kraft Foods

Zacks Equity Research

Kraft Foods, Inc. (MDLZ) recently announced that the U.S. Internal Revenue Service (“IRS”) issued a ruling which approves the tax free status to its pending spin-off into two independent public companies.

Kraft Foods is in the process of separating 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, Inc. The Global Snacks unit will be named Mondelez International, Inc.

As per the ruling which will confer tax free status to the spin-off, neither the shareholders nor the company will be taxed on distribution of shares of the new grocery company, Kraft Foods Group. Any cash paid to set off the fractional shares will be taxable as capital gain to the shareholders.

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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