Spinoff Could Put the Crunch Back Into Kraft

To understand why, let's rewind a moment. Twenty years ago, investors applauded diversity in companies. When the cigarette maker then known as Philip Morris purchased Kraft for $12.9 billion in what was then the largest transaction in history, the market gave the deal a big thumbs-up. It seemed like a good idea to become less reliant on making products that killed your customers, and the processed food business was considered a star performer.

Now a different theory has swept Wall Street. Investors currently prefer companies that do one or two things really well, and urge them to shed operations that divert top managers' attention from core strengths. This is one reason you are seeing so much merger-and-acquisition activity, as business units are being swapped around left and right, and then repackaged and resold to investors as shiny, new, refocused entities.

The person charged with unlocking the hidden value of the Kraft brand will be Irene Rosenfeld, who took over as chief executive of the company eight months ago. Many investors expect her to announce, at a meeting with analysts in New York in late February, a series of sweeping changes, including the sale of many noncore food and beverage lines.

She may also announce that the company, which has very little debt, will sell a ton of bonds and use the proceeds to buy back as much as 8% of the shares outstanding -- a transaction that has the effect of dramatically increasing a company's earnings per share, a key measure of value.

Cheez-It Innovation

Rosenfeld has a daunting task, to be sure, as the packaged-food industry faces formidable hurdles: The price of commodities such as corn has skyrocketed because of global demand for food, cattle feed and ethanol; supermarkets are aggressively marketing high-quality store brands to enhance their own profitability; and regulators are on the warpath against ingredients linked to the obesity epidemic, such as trans fats and high-fructose corn syrup.