Kraft Releases Additional Information On Its Spin

Kraft Foods (KFT) has filed its initial Form 10 detailing the separation of its North American grocery business, which will retain the Kraft Foods Group name, from its global snacks business (soon to be known as Mondelez International). While the snacks business is quite larger with sales of ~$35b and a popular portfolio of brands including Oreos and Cadbury, the grocery company is no slouch with ~$18b in sales and brands such as Kraft Cheese, Oscar Mayer meats and Maxwell House coffee. Those three brands alone each generate over $1b in sales.

The reasoning behind the spin is to allow each company to focus on its individual markets and products and to better allocate resources accordingly. The grocery business is expected to “deliver strong margins and substantial free cash flow with a highly competitive dividend payout,” while the global snacks company is expected “to deliver strong revenue growth and top-tier earnings growth while paying a modest dividend.” Many believe the move is an attempt to separate the more mature and slower-growing business from the faster growing more international business and that seems to fit with the way the company described the businesses.

Taking a quick glance at the numbers, it looks like operating income and margins have come down a bit in the Kraft Foods Group business over the past few years (15.7% in ’11 vs. 17.2% and 16.6% in ’09 and ’10 – despite a 53rd week in ’11), but are still higher than ’07-’08 levels. Commodity prices and related gains or losses from hedging activities might have something to do with that though. Additionally, there are several pockets of strength within the company, such as its refreshment beverage line which includes brands such as Crystal Light and MIO and is expected to exhibit double digit growth.

Commodity prices are a concern for the company though and commodity costs have impacted recent results. In 2011 costs increased “primarily due to the higher costs of dairy products, coffee beans, meat products, packaging material costs, grains and oils” and the company expects the trend of higher prices and volatility to continue into the future. It is obviously a big user of certain commodities, but the company hopes it can combat any related issues by lowering its costs and spending elsewhere and by raising prices. Easier said than done.

The new company will incur $10b of new debt (which will increase the company’s interest expense) and a few billion in pension/retirement costs post-spin. It is likely that the proceeds from the debt will be distributed to the parent company. For additional details on the company, check out the SEC filing.

Current Kraft CEO Irene Rosenfeld (who recently got a nice payday) will head Mondelez while Tony Vernon, currently president of Kraft’s North America business, will become CEO of Kraft Foods Group. The spinoff remains on track to be completed before the end of 2012.

Disclosure: Author holds no position in any stock mentioned.