Kraft Split Will Feed Emerging-Market Growth

NORTHFIELD, Ill. ( TheStreet) -- Kraft Foods' ( KFT) decision to split into two separate companies highlights a trend that consumer foods and goods makers need to focus on higher-growth emerging markets as the outlook for expansion in developed markets remains sluggish.

Along with posting its better-than-expected second-quarter profit Thursday morning, Kraft laid out plans to split into two: a snacks business and a North American grocery business.

The snacks business, with estimated revenue of about $32 billion, will consist of the current Kraft Foods Europe and developing markets units as well as the North American snacks and confectionery businesses, the company said in a statement. The North American grocery business would consist of the current U.S. beverages, cheese, convenient meals and grocery segments and the non-snack categories in Canada and food service. The tax-free spinoff could be complete by the end of 2012.

Kraft's strategic move underscores the recent sentiment of a number of established companies, namely that growth potential in developed markets is weak at best, at least in the foreseeable near term, as consumer spending is kept in check by uncertain economics and still-unstable employment and housing markets. Meanwhile, growth potential in emerging markets is seemingly boundless.

"Given the different investment priorities and growth trajectories of the two businesses, it makes a lot of sense to separate them," Sanford C. Bernstein analyst Alexia Howard noted Thursday. "The strategic rationale for such a move is strong." She said Kraft's split will aid CEO Irene Rosenfeld in expanding Kraft's footprint in emerging markets and take on new acquisitions, all while working to push the company's higher-margin U.S. grocery business forward.

Sara Lee ( SLE) and Fortune Brands ( FO) have been working on similar moves to deleverage their companies through spinoffs.

Sara Lee said in January it would split itself into two separate companies following unsatisfactory takeover bids. Expected to be complete in 2012, Sara Lee intends to spin off its North American retail and food service business, a company that will trade publicly and retain the Sara Lee name. That business includes brands such as Hillshire Farm lunch meat, Ball Park hot dogs and Jimmy Dean sausages. The other company, Sara Lee's remaining international bakery and beverages businesses, which includes Douwe Egberts and L'Or brands, was as yet unnamed but referred to as CoffeeCo and could be based overseas.

Sara Lee also plans to sell its international bakery and North American refrigerated dough businesses by the end of this fiscal year.

Fortune Brands, the maker of spirits such as Maker's Mark bourbon whiskey, Jim Beam and Effen Vodka, golf products under the Titleist brand, and home products like Moen faucets, said in December it would split itself into three separate companies. It said its plan was to spin off its home and security division to shareholders in a tax-free transaction, sell or spin off its golf products business, and continue as a public liquor company. Fortune expects the separation process to be complete in the second half of this year.

Kraft's decision to split "falls in line with other consumer-products companies that have split to better leverage their opportunities," Morningstar Erin Lash told Bloomberg. "It's interesting for Kraft investors and with the tax-free spinoff they will get the benefit of both companies."

Other multinationals like Procter & Gamble ( PG), Colgate-Palmolive ( CL), Kimberly-Clark ( KMB) and Church & Dwight ( CHD) have expressed concern that growth in developed countries will be sluggish.

P&G CEO Robert McDonald echoed those concerns to reporters in Singapore this week, pointing out that P&G's sales in North America, Western Europe and Japan were flat from October of last year through March of this year, according to a report in The Associated Press.

P&G's message was "consistent" with what other executives have been saying, RBC Capital Markets analyst Jason Grere told TheStreet. In the meantime, "economic scenarios will weigh down on a lot of these companies, just as in other industries," Gere added. Now it's a matter of who can execute the best in the second half of this year.

"That's the real question: Who will have the best execution, merchandising and innovation, and will take market share from others in a weak category market," Gere said.

Shares of Kraft were up 94 cents, or 2.75%, to $35.24 in early afternoon trading trading amid very high volume. Nearly 22.5 million shares changed hands less than two hours into the trading session, compared with their average daily volume of just 8.9 million.

-- Written by Miriam Marcus Reimer in New York.

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