The surprise news, announced Thursday, sent shares of the nation's largest food maker soaring in pre-market trading. The move by the food giant to split a high-growth international business from its domestic grocery brands highlights the increasing focus by U.S. companies on growth in emerging markets.
"Simply put, we have now reached a stage in our development with a global snacks and grocery businesses in North America in which each benefit from standing on their own and focusing on their unique drivers of success," Chairman and CEO Irene Rosenfeld said during a conference calls on Thursday.
Kraft said the deal would allow both companies to focus better on their priorities.
The grocery business will cater to traditional domestic retailers with products such as Kraft Cheese and Maxwell House coffee and has estimated revenue of $16 billion. The grocery business would still be one of the largest food and beverage companies in North America and the company said it would build on its leading market positions with some of the world's most well-known grocery foods such as Kraft macaroni and cheese, Oscar Mayer meats and Jell-O desserts.
Kraft's snack business, twice the size with revenue of $32 billion, will emphasize international growth - particularly in attractive emerging markets - with products such as Tang, Cadbury chocolate and Trident gum that are typically sold at quick-stop retailers. The company has built up its snacks business over the years, helped in part by the acquisitions of LU biscuit from Danone and Cadbury PLC. The company said roughly 75 percent of the new snack business revenue comes from international sites and approximately 42 percent from emerging markets, where a growing middle class represents a major growth opportunity for the company.
The deal is expected to take at least a year or more to complete as it works on the structure, management and other issues related to the tax-free spinoff. Taking that into account, the Northfield, Ill., company's current plan is for the split to be complete by the end of next year. Kraft said it plans to maintain investment grade ratings for both companies.
Kraft is the second massive food company split this year. Sara Lee Corp. announced in January that it would split its business into two units by 2012, with one focused on coffee and the other largely focused on meat. Sara Lee's split, however was expected. The company had been slowly transforming itself from a company that made everything from underwear and shoe polish to cheesecake into a narrower business concentrated on food. The company had been selling off business units for years.
Kraft's move was a surprise. The company acquired Cadbury PLC a year and a half ago for $18.5 billion and had shown no intention of dividing itself until now and was not preceding by analyst speculation or market rumor.
Kraft announced its plans to split the company at the same time that it reported that its second-quarter earnings climbed 4 percent to $976 million, or 55 cents per share, from $937 million, or 53 cents per share, a year ago. Revenue rose 13 percent to $13.88 billion from $12.25 billion. Analysts polled by FactSet predicted earnings of 58 cents per share on revenue of $13.08 billion.
Kraft also boosted its full-year forecasts for revenue from existing businesses and operating earnings. Kraft now anticipates so-called organic revenue to climb at least 5 percent, with operating earnings of at least $2.25 per share. Its prior guidance called for revenue to increase at least 4 percent, with operating earnings of at least $2.20 per share. Analysts expect earnings of $2.23 per share.
The food maker's stock gained $2.60, nearly 8 percent, in premarket trading.