Now 18 months into the Cadbury integration, Kraft says it finds itself with two classes of brands that can be best managed separately, and also attract investors who either want to bet on the global growth aspirations of snacks or on the slower growing but steady grocery business in North America.
"We have built two strong, but distinct, portfolios," Chief Executive Irene Rosenfeld said.
Its proposed global snacks business will include Kraft's European business and developing markets units, as well as snacks and confectionery businesses in North America. With about $32 billion in estimated revenue, it will house the likes of Oreo cookies, Cadbury chocolates and Trident gum, all which have greater prospects for growth in emerging markets and to sell more to consumers on the go.
The North America grocery business, with the likes of Kraft cheeses, Maxwell House coffee and Jell-O snacks, lacks the growth potential but comes with stronger margins and more reliable sales. It will have an estimated $16 billion in revenue.
Kraft, based in Northfield, Ill., expects to conduct the split before year-end 2012 through a tax-free spin-off of the North American grocery business to shareholders. Kraft shares were up more than 5% in early trading Thursday to $36.14.
Kraft previously had considered selling its refrigerated-goods business, including Oscar Mayer meats and cheese, according to people familiar with the matter.
A spokesman for Kraft said Thursday, "We have been evaluating this type of transaction over the past several years, and analysts and investors have also suggested this. Creating two strong independent operating entities was not feasible before today. Based on actions we have taken over the past four years, it's an idea whose time has come."
Wall Street analysts have long speculated that this or some other divestiture would happen, as growth prospects for some of the grocery businesses are limited. But the company chose not to take the divestiture route because it would have generated a heavy tax bill, the people said.
After the Cadbury deal, the company began revisiting the idea and decided that the most tax-efficient approach would be to spin off the entire grocery business. The grocery business carries high margins but is slow growing and primarily domestic; in comparison, the snack-food business is high growth and global.
Kraft trades at a lower price-to-earnings multiple than peers such as Nestle SA and Danone, and the company was trying to figure out how to close the gap, people familiar with the matter said.
Several "activist" investors hold shares in the company, including Bill Ackman's Pershing Square and Nelson Peltz's Trian Fund Management LP, and the company had been talking with major shareholders about how to get the stock to move, people familiar with the matter said.
After a review that began last year, the board ultimately concluded that if Kraft couldn't get the sales growth as a combined company, the obvious solution was a spin-off, the people said.
One activist investor was expected to go public in September with a presentation laying out the various options Kraft could pursue, some of the people familiar with the matter said. Part of the reason Kraft chose to separate now was to get ahead of that move and control the message of why the splitting of the company made sense, these people added.
A Closer Look at the Brands
Global snacks divisionAnnual revenue: $32 billion
- Oreo
- LU biscuits
- Cadbury
- Milka chocolates
- Trident gum
- Jacobs coffee
- Tang powdered beverages
Annual revenue: $16 billion
- Kraft macaroni and cheese
- Oscar Mayer meats
- Philadelphia cream cheese
- Maxwell House coffee
- Capri Sun beverages
- Jell-O
- Miracle Whip
"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," wrote Barclays Capital analyst Andrew Lazar in a note.
On Thursday morning, Mr. Peltz issued a statement read on CNBC saying he was "very supportive" of management and the board for coming to the decision to break Kraft into two pieces. He said it is in the best interest of shareholders to create one consumer-products company that would grow more slowly and would likely be high dividends, and a second snacking company that would grow more quickly. The Cadbury purchase, he said, was one piece of the puzzle that ends with the Kraft breakup.
A Securities and Exchange Commission filing in June showed Mr. Peltz's Trian was back in Kraft, with 12.2 million shares, or just under 1%. Mr. Peltz first bought into Kraft in 2007 and urged the company to focus on its best brands, but he agreed to keep a low profile and last year sold his Kraft stock.
Meanwhile, companies' decisions to split up have been gaining momentum lately.
Oil giant ConocoPhillips recently said it is splitting into two publicly traded companies, one that produces oil, and one that refines it. Chief Executive Jim Mulva said he thought the company's core businesses would be more competitive and highly valued as separate companies. "ConocoPhillips today is not understood or well appreciated in the marketplace," he said.
Also last month, Ralcorp Holdings Inc. said it was splitting up its Post Foods cereal and private-label food businesses, with Post Foods—maker of Grape-Nuts and Post Raisin Bran—being spun off to Ralcorp shareholders.
Among other companies in recent months that have announced plans to split are Fortune Brands Inc., Sara Lee Corp., Motorola Inc. and a number of other energy companies.
Higher commodity costs have dented food makers' results recently, as their ability to pass along the cost to consumers is limited amid weak consumer confidence and high unemployment.
Kraft also reported earnings Thursday. For the second quarter, Kraft reported a profit of $976 million, or 55 cents a share, up from $937 million, or 53 cents a share, a year earlier. Operating earnings rose to 62 cents, driven by currency and operating gains, while net revenue climbed 13% to $13.9 billion, helped by price increases. Analysts polled by Thomson Reuters were looking for 58 cents and $13.2 billion, respectively.
Gross margin slipped to 35.1% from 38.3% on higher commodity costs.
Kraft also raised its guidance for the year, projecting operating earnings of at least $2.20 to $2.25 and organic net revenue growth of at least 4% to 5%. The prior view had been for at least $2.20 in earnings and organic net revenue growth of at least 4%, excluding the impact of accounting calendar changes.
"Despite rising input costs and a volatile economic environment, aggressive cost management coupled with strong revenue growth gives us confidence that we will deliver top-tier performance for the year," Chief Financial Officer David Brearton said.
—Anupreeta Das, Gina Chon and Shira Ovide and contributed to this article.
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