Kraft Foods Inc (NASDAQ:KFT) announced today that next month it is splitting into a snack company called Mondelez International and a North American grocery business with the Kraft name, however the announcement failed to impress investors. The split will provide options to the shareholders to choose from the fast growing snacks business, or from the stable dividends offered by selling groceries.
Mondelez, which boasts of brands like Cadbury chocolate, Oreo cookies, and Trident gum is all set to become a $36 billion company which generates almost 45 percent of its revenues from developing markets. In the long run, the company expects a double digit growth in operating earnings per share, excluding the impact of currency. However its global reach and weakening of various currencies against the US dollar will bring down its earnings by 15 percent for the next year, Kraft Foods Inc (NASDAQ:KFT) said in its first official forecast for Mondelez. The snacks company could experience revenue growth of 5 percent to 7 percent in the long run, but for the next year the growth could be at a lower size, mainly due to smaller contributions from price increases. The company’s gum business has suffered a lot in the current economic scenario. The executives blame the uncertain job market, saying people chew a lot of gum while at work, or on their way to work, and that if they are working less, they chew gum less.
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“That is the prime reason for being potentially at the lower end in the near-term,” said Irene Rosenfeld, Kraft’s current chief executive, who will lead Mondelez. She also said that easing coffee prices will help lower the prices of its coffee products, including the popular Maxwell House brand, which after the split will stay with Kraft foods, but Mondelez will sell it overseas. She also said that Mondelez will invest more in its current business, with a strong focus on adding new products and new markets, along with pursuing acquisitions to increase its portfolio.
After today’s meeting between Mondelez executives and investors, Kraft Foods executives will meet with investors on Friday. The split will leave Kraft foods group be concentrated in North America, with brands like Oscar Mayer lunch meat and Velveeta cheese. The post split Kraft Foods Inc (NASDAQ:KFT) has to face the slow growth rates in the North American packaged food industry, along with volatile commodity costs. The company said that it will come out of the combined company’s “post office culture” that was “rife with bureaucracy and entitlement” and will issue promotions to the deserving, rather than basing it on longevity.
“We will finally purge the post office culture that so many of you have talked about,” Chief Executive Tony Vernon said.
The Kraft Foods Group executives also revealed plans for the new company, including making “big bet innovations” to create new products and refresh existing products. Kraft Foods Group will be the fourth-largest packaged food and Beverage Company in North America, trailing PepsiCo, Inc. (NYSE:PEP), Nestle SA (ETR:NESR) (FRA:NESR), and The Coca-Cola Company (NYSE:KO).
At the time when the plan for a split was announced, the legendary Warren Buffett & Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) agreed with the plan, saying he “does not see any negatives to this spin-off.” Warren Buffett’s Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B), at a point, owned close to 10% of shares outstanding, now it’s closer to 6% of shares of Kraft Foods Inc (NASDAQ:KFT). We have yet to hear from the Oracle of Omaha on this issue. A spokesperson for Berkshire Hathaway Inc. (NYSE:BRK.A) (NYSE:BRK.B) declined to comment on the matter.
Dan Loeb recently purchased a large stake in Kraft, albeit much smaller than Berkshire’s stake.
The spin-off is planned for October 1.