Kraft Skids on Management Shake-Up, Altria's Woes

The food maker says two top executives are leaving, while its parent may face new court problems.
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Updated from 8:38 a.m. EDT



shares slid Wednesday, hurt by a management shakeup at the company as well as news of potential woes for its parent company,


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The food maker's shares ended down $1.16, or 3.6%, at $31.32, after the company said Irene B. Rosenfeld, president of its North American business, and Michael B. Polk, group vice president of the North American operation and president of the Nabisco unit, were leaving the company to pursue other opportunities.

The announcement signals that business trends are not "fully meeting goals," especially on the "top line," said John McMillan, an analyst at Prudential Securities, in a research note.

"Irene Rosenfeld was the No. 2 executive in North America, and her departure is a shock to us. Kraft generates over three-quarters of earnings from North America," said McMillan. "Rosenfeld's leaving is a big loss for the company. We assume she is leaving to better look for another top position in the industry, but one reason that Kraft was spun off into a public company was to better retain executives." Prudential doesn't have a banking relationship with Kraft.

The news follows an announcement last week that Kraft plans to cap portion sizes and provide more nutrition information on its products, as the food industry increasingly deals with obesity concerns. There was a recent case against the company based on claims that Oreo cookies were unhealthy, but according to Stephen Joseph, chief executive and counsel for California-based non-profit Inc., which brought the lawsuit, it was voluntarily dismissed following Kraft's announcement of its decision to undertake initiatives to reduce or eliminate trans fats in its cookies and crackers. Kraft also said it would eliminate all in-school marketing. Joseph said he regards the lawsuit as a "total success."

The government is becoming more strict, too: After 10 years of going back and forth on the issue, it said Wednesday that it will require food makers to reveal exact levels of trans-fatty acids, which clog arteries, in their products.

Meanwhile, Kraft's parent company was in the spotlight Wednesday, a day after an Illinois appeals court heard arguments about whether Judge Nicholas Byron, a lower-court judge, had the authority to reduce a bond that Altria was required to post when it appealed a $10.1 billion verdict.

"People are scared they will reinstate the $12 billion bond," said James Morris, an analyst at Utendahl Capital Partners, which has had a banking relationship with Kraft. "It would be difficult for them to come up with that money." Altria put up a $6 billion bond in order to secure its appeal; the company was initially asked to post a $12 billion bond, but said that would force it into bankruptcy.

According to Morgan Stanley's tobacco analyst, David Adelman, the appeals court probably will find that Byron lacked the authority to alter the $12 billion bond. The company is appealing a class-action suit that alleged that its main operating unit, Philip Morris, claimed "light" cigarettes were safer than "full flavor" ones.

"There is a potential liability there for Kraft," said Christine McCracken, an analyst FTN Midwest, noting that the stock trades in tandem with Altria. FTN Midwest has no investment banking relationship with the company.

Kraft was spun off from Philip Morris in an initial public offering two years ago, but is still essentially controlled by the tobacco giant. Altria owns half of Kraft's Class A common stock and almost all of its voting stock. Some market watchers have suggested that Kraft could be ensnared by Altria's legal problems, as Altria could conceivably be forced to dip into Kraft's reserves in order to pay off its debt.

Altria helped drag down the Dow Wednesday, ending down $2.77, or 5.9%, at $44.

As for Kraft's new management, Daryl G. Brewster, 46, formerly group vice president of Kraft North America and president of the Canada, Mexico and Puerto Rico operations, will succeed Polk. Brewster will be responsible for brands including Oreo, Ritz, Planters, Life Savers, Chips Ahoy! and Altoids. Kraft didn't announce a replacement for Rosenfeld.

Regarding Polk, "the question of whether

his departure signals any problems at Nabisco can be debated, but it is clear that category conditions are soft and obesity issues are present," said Prudential's McMillan.

Whether Kraft's efforts at healthier food will pay off is unclear. "The company tried for years to make its food healthier, but it didn't work. People didn't like the taste," said FTN's McCracken. "They may sell more products. This is a good effort to address the situation. But I do not know if it will ultimately have an impact."

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