Why the Kraft Split Makes Sense



(KFT) CEO Irene Rosenfeld probably should have spun off its North American grocery business years ago.

The business, which includes such iconic brands as Kraft Macaroni & Cheese, Oscar Mayer meats and Miracle Whip salad dressing, has about $16 billion in annual revenue. Revenue in the last quarter was up 2.5% from a year earlier.

However, the company's emerging market and European businesses both grew revenue more than 20% to $4.03 billion and $3.53 billion, respectively.

The spinoff shows that the food company recognizes that the North American business will never grow at the same rate as its overseas business. And it's not alone in that line of thinking.

Companies Head for Greener Pastures Overseas

Lately, investors have found it more profitable to back the international business, and for good reason. While the U.S. is the largest economy in the world -- at least for now -- it is also among the most mature. Many companies see much greater opportunities for growth overseas. For instance, China overtook the U.S. as the world's largest Internet market in 2008. A year later, the most populous country also overtook the U.S. as the largest auto market.

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Sara Lee (SLE), maker of Ball Park franks and Sunbeam bread, announced it would split in two in January. A month earlier, Fortune Brands (FO) announced plans to split itself in three.

In 2008, Altria Group (MO) spun off its Philip Morris International (PM), setting the stage for a series of huge spinoffs in the consumer-product sector. Altria has gained more than 21% over the past year, more than half of the 35% gain of Philip Morris.

That said, investors in Altria get a fat yield of 5.9%, as Motley Fool analyst Matt Koppenheffer has noted. Though trailing Altria's payout, Sara Lee and Fortune also pay dividends of 2.4% and 1.4%, respectively.

What's Kraft Cooking Up for the U.S. Market?

In an interview with Bloomberg News, Rosenfeld said the deal would give New York-based Kraft the flexibility to acquire brands that smaller consumer-products companies may want to discard, particularly if the economy hits a double-dip recession. Interestingly, Kraft said it wasn't selling any of its brands as part of the transaction. Kraft also hasn't received offers for either unit.

"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," Rosenfeld said, according to Bloomberg.

What should Kraft shareholders expect to get back from this split? The company's growth characteristics are similar to the tobacco companies', so Kraft's North American business will have to offer a generous payout once the deal is done.

And if Kraft's spinoff goes well, look for other companies to follow suit and spin off their faster-growing units. Let us know which companies you think will be next.

Motley Fool contributor Jonathan Berr does not own shares of the companies that are listed. The Motley Fool owns shares of Philip Morris International, Altria Group, and Fortune Brands.

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