At least for a little while, Kraft (NYSE: KFT) shares were a shiny green beacon in a vast sea of red yesterday as investors cheered the company's announcement that it will be splitting itself into two businesses and delivering shares of the newly created spin-off to its shareholders.
The company will hack off a chunk that holds its North American grocery business, which includes brands like Kraft macaroni and cheese, Philadelphia cream cheese, and Maxwell House coffee. That new company is expected to have around $16 billion in annual sales. Meanwhile, Kraft will focus on the company's current snacks and candy business -- a $32 billion grouping that will house the recently acquired Cadbury brands, as well as other Kraft brands like Oreo, Trident, and Tang. The latter business gets 42% of its revenue from developing markets.
While the stock's gains didn't hold yesterday -- even though a 1.5% loss on a day like yesterday could be considered a win -- there seem to be many investors out there who think the transaction could be a big winner for shareholders.
Seek to understand
It may seem confusing that Kraft would split in this fashion -- why keep Oreo and Jacobs coffee but jettison Jell-O and Maxwell House? But the way to think about the split is in terms of Kraft's growth and non-growth businesses.
In a transaction like this, companies often talk about "unlocking shareholder value," which typically means they believe investors are not giving the company full credit for the component parts of its business. And in this case, Kraft may be entirely correct.
To be clear, from a business perspective, I actually think Kraft was just fine the way it was. What you had was a group of higher-growth segments that sold snacks and served the peppier international markets, which were balanced out by the more profitable, but more sluggish, U.S.-focused businesses.
In theory there's nothing wrong with this, but when investors start aligning themselves with dogmatic factions -- "I am a growth investor" or "I am a dividend investor" -- then a large company like Kraft can fall into a no-man's land where it's not really a favorite of any group and consequently ends up with a low valuation. By splitting the company in two, the higher-growth snacks business can woo growth investors while the slower-growing U.S. grocery business can look to be a favorite of value and dividend investors.
Breaking up is easy to do
The transaction actually smells a lot like what former Kraft parent Altria (NYSE: MO) did just a few years ago when it spun off its faster-growing international business in Philip Morris International (NYSE: PM). In that deal, investors ended up with Altria as a slow-growth, high-dividend U.S. business and Philip Morris as a higher-growth international play.
More recently, breaking up seems to be very in vogue in the consumer goods world. Sara Lee (NYSE: SLE) has decided to split up, dividing up its North American retail and foods business from its beverages and international bakery operations. Ralcorp (NYSE: RAH), meanwhile, decided to jettison the Post Foods business it bought from Kraft in 2007.
Outside of the consumer staples industry, there has also been a significant number of spin-offs announced, including both Marathon Oil (NYSE: MRO) and ConocoPhillips deciding to split off their refining businesses, and American Airlines parent AMR Corp. unloading its American Eagle regional airline.
As the U.S. continues to drag its feet in terms of growth and recovery, it wouldn't be all that surprising to see the idea of splitting into slow-growth U.S. and higher-growth international segments get contagious. It might be a long shot to think of a company like Procter & Gamble (NYSE: PG) slicing and dicing, but it wouldn't surprise me if there were other major moves in the sector -- for instance, Colgate-Palmolive (NYSE: CL) making its hot-to-trot international arm a pure play.
Here's the good news
For current shareholders of Kraft, I think the phrase "unlocking shareholder value" will probably be a good description for the outcome of this move. Given the mentality of most investors -- institutional and retail alike -- the component parts of Kraft may find more buyers once their individual strengths are highlighted.
While none of this may give you the itch to buy, it may be very worthwhile to keep an eye on Kraft and the other companies in this sector. You can add any of these stocks to your Foolish watchlist by clicking the "+" icons above. Don't have a watchlist yet? Set one up today for free by clicking here.
