Kraft to become independent Chicago HQ?

[The Urban Politician]

Kraft may eventually spin off from New-York based Altria group. This is a good thing, since it will finally become an independent corporation in Chicago not owned by an outsider. Here's the article:

October 23, 2004
Kraft's pruning could set up spinoff
Either way, investors like talk of shedding slow-growth businesses


By Julie Jargon



Rumors swirling around Kraft Foods Inc. have it mulling the sale of divisions with a combined value of $13 billion. Regardless of which are sold, slimming down would help prepare Kraft for a spinoff from parent Altria Group Inc.
There's speculation that Kraft is putting brands on the block, from Altoids and Life Savers to Post cereal and Oscar Mayer. The candies alone could fetch $1 billion-plus.


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"Their free cash flow is $2.6 billion a year, so why is Kraft raising cash when cash is not a problem?" asks Mark Hugh Sam, an analyst at Chicago investment researcher Morningstar Inc. "Although this is purely speculative, getting ready to be spun off by Altria could be part of it."
In a spinoff, Kraft might need cash to pay a large dividend to New York's Altria, which owns almost 85% of Kraft's shares.

Altria CEO Louis Camilleri has said it would make sense for Altria and Kraft to part ways. Some investors agree, arguing that untying Northfield-based Kraft from its tobacco-producing cousin, Philip Morris USA, would sever the link to litigation — and lift the stock.

Investors at Davis Selected Advisers, with 7.9 million Kraft shares, are eager for that. "We hope this spinout might be accomplished over the next two years," Davis managers wrote recently.

Even so, some investors don't see brand sales as a sign a spinoff is coming. Thomas Russo, a value investor at Gardner Russo & Gardner, a Pennsylvania money manager with 1.7 million shares of Kraft, says unloading brands is "consistent with a more focused management approach."

Sources close to the situation say Kraft has hired UBS to sell Life Savers and Altoids; Citigroup is said to shopping Breyers yogurt. Kraft won't comment.

Spinoff or no, a slimmer Kraft is attracting value investors like Mr. Russo, as well as Clipper Fund Inc. and Harris Associates L.P. Clipper and Harris each has increased its Kraft holdings by more than 2 million shares over the last year.

Kraft stock hasn't strayed much from its 2001 IPO price: $31 a share. "Normally, you don't find a company of Kraft's quality . . . trading for only 14 times earnings," says Morningstar's Mr. Hugh Sam, referring to the roughly $28 share price when Clipper and Harris upped their stakes. (Kraft traded near $33 last week, roughly 17 times projected 2004 earnings.)

[The Urban Politician]

Screw you guys! I won't let this thread go reply-less

[geoff_diamond]

rofl! I finished reading it and was sort of like "heh... well, I've got nothing to say to that"

[Kevin J]

As a stand alone outfit, Kraft would be a Fortune 200 company. But other than bragging rights and maybe some increased philanthropy, I'm not sure what this would bring to Chicagoland. Because Kraft is the only food-producing part of the Altria conglomerate, it already operates pretty independently and never lost a big number of jobs when it was taken over by Altria, nee Philip Morris, 15 or so years ago. They still have a large complex in Glenview that includes test kitchens, brand managers, etc. As a result, becoming an independent company wouldn't add too many more jobs.

But I'm not convinced a spin off is even in the works. The article leaves out the possibility that Kraft is selling off poor-performing divisions simply to improve their sales and stock numbers. There was a big management change at Kraft within the last year specifically because of its sluggish sales and stock price. Perhaps new management is just cleaning house in order to improve the numbers (and keep their jobs).

[The Urban Politician]

The spinoff's happening, Kevin J! :)
Another one for Chicago's Fortune 500 HQ tally (even though it won't create more jobs):


Kraft facing freedom from Altria
Kraft shares rise on Camilleri’s break-up plans





(Reuters) — Altria Group Inc. has begun preparing itself for a possible break-up, once tobacco lawsuit hurdles are cleared, to realize full value of its tobacco business, its chief executive said on Thursday.
Shares of Altria, which owns Philip Morris USA, Philip Morris International and about 85 percent of Kraft Foods Inc. jumped almost 10 percent. Shares of Kraft rose almost 3 percent.


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Chairman and Chief Executive Louis Camilleri said during an investor conference that the company's Philip Morris tobacco businesses are significantly undervalued when compared with their peers.
``Our over-riding objective is to deliver superior returns to our shareholders, and towards that end, we are working to resolve the litigation issues at PM USA and beginning the necessary preparations for a potential breakup once the litigation environment permits,'' he said.

Kraft Foods has struggled in recent months as consumers have eschewed foods like Oreo cookies amid concerns about growing obesity and the popularity of low-carbohydrate diets.

Financial analysts have long said the company is likely to spin off Kraft after several tobacco lawsuits have been finally adjudicated, though Camilleri's comments Thursday were the strongest the company has made to date about a spin off. Analysts have also said the company could split up its U.S. and international tobacco businesses.

On Wednesday the Florida Supreme Court heard arguments about whether it should reinstate a $145 billion class-action verdict against the company and other cigarette makers that was overturned by an appeals court. That case is known for the pediatrician who is a plaintiff, Howard Engle.

Next week, the Illinois Supreme Court will hear arguments over a $10.1 billion verdict against Philip Morris USA over whether it deceived consumers into thinking ``light'' cigarettes were less dangerous than regular ones. That case is known as the ``Price case'' for a plaintiff.

The company is also part of a major lawsuit being tried in Washington brought by the U.S. Department of Justice.

``We've been pretty clear that what we have to see is victory in the Price, DOJ and Engle cases, that we can manage the (other) lights cases and that there won't be some new novel theory from the plaintiffs side,'' Camilleri said, answering an analyst question. The company hopes to have rulings in the three big cases by next summer.

Kraft was acquired in 1988 by the company that was then called Philip Morris for about $13 billion. The business was combined with General Foods, which Philip Morris bought in 1985 and then later with Nabisco, which was bought in 1990.

The market value for 85 percent of Kraft is about $45 billion, which would sharply increase the available amount of food company stock in the marketplace, Tim Ramey, food industry analyst with D.A. Davidson, said.

``From a supply and demand standpoint, there is going to be some rough sledding for a while,'' Ramey, who rates the stock ''underperform,'' said. ``But having said that, it probably is a good thing to have an independent Kraft though there won't be that many changes. Perhaps their tax rate will be lower.''.

Altria shares were up $4.24 at $54.24 on Thursday afternoon on the New York Stock Exchange and Kraft was up 92 cents at $34.35.

[Kevin J]

^Yes, I saw a story in this morning's paper and thought of you, Urban. I'll get excited when Kraft announces they're moving their headquarters to the Loop!

[24gotham]

Kraft was once headquartered in Streeterville. They used to make mayonaise there along with other products. Wierd to think they made mayonaise in what has become such a wealthy neighborhood.

[Chi-town]

Kraft has been semi-independent for some time. My dad was a vice president and general counsel (i.e. the head lawyer for the company), and president of Kraft GmbH (their German division), shortly before they were purchased by Altria, and they still maintain the headquarters in Northbrook. Kraft stock trades separately from that of its corporate parent, so a breakup was almost guarranteed.

The issue is that Altria is also the parent of Phillip Morris. Tobacco companies, for obvious reasons, aren't perceived very well by the market, so that creates a drag on the company's valuation and stock price. By separating Kraft, a food industry powerhouse, from the tobacco business, they're able to realize far more value.

I actually worked for an investment bank in Chicago this summer that is exploring the sale of the Oscar Mayer division for Kraft, and there are 3 or 4 potential buyers (none of which are in Chicago, unfortunately). But I can't say any more because I'm bound by confidentiality.