Kraft Foods’ decision to split itself in two has surprised industry watchers, not least because the US food giant believes the two companies – a North American grocery business and a global snacks maker – will benefit from greater focus. However, as Dean Best writes, we have had that argument before – when Cadbury tried to fend off Kraft’s takeover bid in 2009.
At the height of its takeover defence in the final weeks of 2009, we heard a lot about Cadbury’s “strong position as a unique, pure-play confectionery business”.
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Then Cadbury chairman Roger Carr, as he tried to fend off the hostile bid from Kraft Foods, attempted to win over the UK company’s investors by pointing to its “iconic brands, sharp category focus and enviable geographic footprint”.
“Pure-play” and “focus” were oft-repeated reasons why Cadbury should remain independent and not be sold to Kraft, a company Carr derided as having a “low-growth conglomerate business model”.
We all know what happened next. Kraft sweetened its takeover bid, Carr surrended and the US food giant won the battle. Irene Rosenfeld, Kraft’s chairman and CEO, insisted Cadbury would benefit from being part of a larger business.
“This deal is about growth. Our increased scale will allow us to increase investment in Cadbury brands,” Rosenfeld told analysts on the day it secured the backing of the confectioner’s board.
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By GlobalDataOver eighteen months on, Carr has appeared – belatedly – to have won the argument. Yesterday, Rosenfeld announced plans to split Kraft in two. A North American grocery business would be created, generating sales of US$16bn a year and selling brands from Philapdelphia cheese to Jell-O desserts. The move would also lead to the formation of a global snacks maker selling over $32bn of chocolate, candy, gum and biscuits – with Cadbury at its heart.
When Rosenfeld discussed the split with analysts yesterday, the word “focus” featured heavily. “We’ve now reached a stage in our development where the global snacks and grocery businesses in North America would each benefit from standing on their own, and focusing on their unique drivers of success,” Rosenfeld said.
She went on. “Creating two independent companies offers a number of benefits. Each business would focus on its distinct strategic priorities with financial targets that best fit its own markets and unique opportunities.”
And: “As a consequence of being more targeted and more focused in defining the mandates of these two different businesses, we would expect better bottom line performance.”
Of course, Kraft’s move isn’t a complete return to the Cadbury of old. The global snacks business will have brands like Lu biscuits – which the US group acquired from Danone in 2007 – Jacobs coffee and Tang powdered drinks.
And Rosenfeld did indicate that such a move had been in the offing for a number of years, perhaps since Kraft made the Lu deal four years ago.
When Citigroup analyst Dave Driscoll asked Rosenfeld if Kraft had been considering “all along” after it acquired Cadbury, she said: “As we acquired Lu and Cadbury and we began to put these businesses together and we continued to look at our strategic plans for the combined company, it was clear that we had very different businesses in the portfolio and we believed that there could be great value created by unlocking those two businesses to push through their own unique strategic priorities.”
Moreover, the decision has won plaudits on Wall Street. Sanford Bernstein analyst Alexia Howard said the rationale for the split “seems sound”. The North American grocery business, while not enjoying the growth of the snacks arm, could, Howard argued, pursue bolt-on acquisitions.
The company, she reasoned, had “two distinguishing features – wall-to-wall presence and chilled products”. She added: “We think the wall-to-wall presence in multiple aisles of the store creates strong negotiating leverage with retailers. This means that they could create value through bolt on acquisitions of premium regional brands in the US and scale them across Kraft’s national distribution infrastructure to create value, much like Kellogg’s acquisition of Kashi back in the day.”
The snacks business, meanwhile, could see its EBIT grow at a “high-teen level for several years”, she said, with over 42% of sales in emerging markets and the benefit of the “revenue synergies” from the Cadbury acquisition.
Over at Barclays Capital, Andrew Lazar, who is said to have been the first Wall Street analyst to have put forward the idea of Kraft’s dividing in two last September, agreed the reasons for the deal “made complete sense”.
Lazar questioned the timing (last September, he said Kraft would spend the next two years integrating Cadbury and then would perhaps look to a split to drive organic growth) but said the move would drive the snacks business forward and improve shareholder value.
“Kraft is just in the thick of synergy generation so we are a bit surprised by the timing. Still, the strategic rationale makes complete sense to us, as Kraft finally is coming to terms with two separate reasons for being, for its two businesses [are] likely to not only maximize growth for snacks but also investor return through grocery.”
Thinking of Kraft’s investors adds some intrigue to the announcement. And the name of Nelson Peltz springs to mind. Peltz has been a thorn in many a food company’s side in recent years and, four years ago, acquired a stake in Kraft. He was said to have pushed Kraft to offload under-performing brands and make better use of its cash. Months later, Kraft announced the sale of its Post cereals business to Ralcorp Holdings.
Two months ago, as reported in the just-food blog, Peltz returned to Kraft’s share roster. Did he have any input in Kraft’s decision to split in two? Peltz was widely seen as the catalyst for the de-merger of Cadbury Schweppes in 2008, the move that paved the way for the “pure-play” Cadbury plc.
Perhaps we will never know. What is certain, however, is that Kraft’s belief in focus revisits many of the arguments we heard when it was facing a Cadbury determined to stay independent. Has Rosenfeld’s apparent volte-face dented her reputation?
