Kraft split could be a win-win
July 10, 2012 7:44PM
Updated: August 12, 2012 6:08AM
D ear Mr. Berko: I bought 300 shares of Kraft almost two years ago and have a decent profit, though its dividend has not increased as you indicated it would in your July 2010 email to me. Well, it hasn’t increased its dividend. Now I read that Kraft is going to split into a snack business called Mondelez and a grocery business that will keep the Kraft name. I want you to tell me if this spinoff will be taxable. I want you to tell me why Kraft decided to divide itself into two companies. I want you to tell me how many shares of each company I will have after the spinoff. I also want you to tell me if you would recommend the sale of the snack or the grocery business. And I also want you to tell me if you own any Kraft stock personally or in a trust.
Dear HF: I’m certain I said Kraft “should” rather than “will” increase its dividend. And you’re right. They haven’t, but I still think they “should.” I don’t own Kraft stock, but I do have a second or third step-cousin on my mother’s side of the family who made a good living writing recipes for Kraft and claims to have dated James Kraft before he founded Kraft Foods. She also developed new consumer products for Fortune 500 companies such as Colgate Peanut Butter, IBM Stick Deodorant, General Motors Beer, Pfizer’s Pretzels and two soft drinks, Nurse Pepper and 6-Up, none of which were commercial successes.
Yes, Kraft announced in August 2011 that it will break up its food business in two separate, public companies in late 2012. But management, while paying lawyers $63 million for this counsel, has been advised to keep the share distribution numbers under the hat. However, a reasonable guess is that 10 shares of the old Kraft would produce four shares of the new Kraft plus 100 shares of the snack food company.
Kraft (KFT — $38.50) will divide itself into two new companies: Kraft Foods (KFT — estimated at $14), its North American grocery business with $19 billion in revenues from brands such as Oscar Mayer, Kraft branded cheeses, Maxwell House Coffee, processed meats, dressings, condiments, Miracle Whip and other established items, and Mondelez (MDLZ — estimated at $30) a global snacks company with revenues of $33 billion that derive from iconic brands such as Oreo Cookies, Cadbury, Nabisco, Tang, Trident, LU and Jacobs.
According to management, Kraft spends too much money marketing and advertising its slower-growing, high margin, domestic grocery business. The spinoff will enable Mondelez to reduce costs and increase income from its higher-margin, faster-moving, larger snack food division. This should give shareholders better pluck for their buck. Other consumer retailers (Fortune Brands, Sara Lee and Ralcorp Holdings) have jettisoned slower-moving product divisions to concentrate efforts on their more profitable products. This makes sense. And during the process, the slower-moving divisions usually improve their growth and profit margins.
So it could be a win-win, and I suggest you keep KFT and MDLZ. According to some Kraft watchers, including S&P, “the company will be worth $44 a share when broken in two.” Revenues for 2013, in spite of the economic slowdown, are expected to grow 5.5 percent to $58 billion, and earnings may come in at $2.80 a share, up 11 percent on improving net profit margins.
While I like the company, I do not like the Mondelez moniker, which in the Russian language is a vulgar word for oral sex. It also reminds me of General Motors’ embarrassing kerfuffle when the Chevy Nova was introduced to South America in the mid 1960s with a huge advertising campaign. “No va” in Spanish means don’t go! Wow! But Mondelez is a combination of two Latin words: “monde,” meaning world, and “lez,” means delicious. But what an undelicious name! It sounds like the mussitations of a drunk waking up with a blinding headache the morning after. Perhaps Lance, Frito Lay, General Mills and Kellogg bribed the KFT board to accept the Mondelez name and stifle competition or the Kraft boys have been putting too much vodka in the water cooler Tang again.
Address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775, or email him at firstname.lastname@example.org.