Kraft Foods IconKraft just announced plans to split into two business units. Kraft plans to have post split; a $16 billion North American grocery business, whose products include Kraft Macaroni & Cheese and Oscar Mayer meats, and a $32 billion global snacking business, which will include Cadbury, Trident gums and Oreo cookies.

Warren Buffett at a point owned close to 10% of shares outstanding, now it closer to 6% of shares of Kraft.

Warren Buffett weighed in on the spin-off issue in a conversation with Becky Quick. Buffett “does not see any negatives to this spin-off”, and agrees with it.

I thought this was interesting because even before the announcement, Tom Russo said that Kraft does not have the ability to re-invest its cash flow profitably. He discussed this in our interview (My interview with Tom Russo will be posted in the coming weeks.)  and at a recent presentation, which can be found here- Tom Russo on the Capacity to Suffer

He said evidence of that was the acquisition of Cadbury at a very high premium (which Warren Buffett criticized as well) 18 months ago. I think the split is further evidence that Russo is right and Buffett is wrong on this one, since splitting up the company shows that the company is not operating effectively and the expected “synergies” from the Cadbury acquisition, seemed not to have worked out to well.

Russo is a big fan of Nestle, which he purchased in 1987 since they can reinvest their cash flows profitably, and are able to achieve growth organically as opposed to growth through acquisitions.

Below is the video discussing Buffett and the spinoff.

Disclosure: No position in Nestle or Kraft

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