Will Kraft Spin Out of Control?
For more than seven decades, Kraft Foods (NYS: KFT) has created family favorites like the company's iconic macaroni and cheese dinner. Today, Kraft is the second largest branded food and beverage company worldwide, with annual revenue exceeding $49 billion. However, the U.S. food manufacturer plans to cut jobs and consolidate its North American management centers as it executes a spinoff into two separate public companies. Is this still a good play for investors? Let's take a look.
The first company will consist of Kraft's global snacks operation, which includes Cadbury, Oreo, and Trident brands. The second will include the higher-margined domestic grocery business. Casualties of the split include 1,600 U.S. jobs. Kraft blames about 40% of the job cuts on the realignment of U.S. sales and claims that about 20% of the jobs are currently unfilled positions.
While axing much-needed U.S. jobs is never easy, it'll help the food giant slim down operations where it counts. Kraft plans to reduce the number of management offices across the country down from four to two. This should be a positive for Kraft (and investors) as it looks to create two companies that are both leaner and more competitive on their own.
As my Foolish colleague Matt Koppenheffer pointed out, Kraft is no stranger to successful spinoffs. In 2008, Kraft's former parent company, Altria (NYS: MO) , spun off its global business in Philip Morris International (NYS: PM) . Similar to Kraft's ongoing split, the Altria deal made room for its Philip Morris business to pursue growth in emerging markets.
Since the 2008 split, Altria and Philip Morris have outperformed the Dow Jones Industrial Average, returning 52% and 61%, respectively, over the Dow's mere 6% return for the same period, so there is evidence that both of the companies left after a spinoff can still thrive.
According to a recent report by Global Industry Analysts, the global snacks food market is set to reach $334.7 billion by 2015. The split should better position Kraft to market its snacks business in emerging markets such as China. Additionally, a push into emerging markets would put Kraft in more intense competition with PepsiCo (NYS: PEP) . Pepsi leads the global snacks space with a 15.9% market share over Kraft's 6.6%.
Kraft's split gives investors the opportunity to buy a piece of a multinational growth company or put their money into a more stable, dividend-friendly domestic one. Either way, I think Kraft's on target to unlock long-term gains.
Let me emphasize that Kraft isn't the only American company set to dominate emerging markets. I encourage you to read this special free report from The Motley Fool's top analysts, which reveals "3 American Companies Set to Dominate the World." To get instant access to this free report click here, now.
At the time this article was published Foolish contributor Tamara Rutter owns shares of PepsiCo. Follow her on Twitter using the handle: @TamaraRutter. The Motley Fool owns shares of PepsiCo, Altria Group, and Philip Morris International. Motley Fool newsletter services have recommended buying shares of Philip Morris International and PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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