What do Titleist golf balls, Oreo cookies and Arby’s restaurants have in common?
Not very much, except that the parent companies of each are part of a 2011 trend that has seen companies across various industries break up and spin off underperforming or uncomplimentary businesses.
Kraft Foods is the latest to do just that, announcing Thursday morning that it will separate its fast-growing global snacks business – home to brands like Oreos and Cadbury – from its more U.S.-centric grocery business – with household names like Easy Mac, Maxwell House and Jell-O. (See "Kraft To Divorce Oreos And Easy Mac In Breakup.")
Now, Kraft’s separation won’t take place for some time – the company is targeting year-end 2012 for completion of the grocery segment spinoff – but it is the latest in a trend of companies pursuing a divide and conquer strategy. This year alone Wendy’s sold its Arby’s unit to Roark Capital, Marathon Oil spun off its refining operation and Fortune Brands announced plans to fracture into three pieces and sold its Titleist-led golf unit to Fila Korea. More recently, ConocoPhillips announced a split of its upstream and downstream businesses that will leave it with the largest pure-play oil and gas exploration and production business in the U.S. (See "Oil Breakup.")
While each corporate situation is different, the rationales behind breakups often have similarities, such as getting rid of a more capital-intensive, slower-growing or non-core business. Another similarity comes in the cast of characters behind the scenes, which often includes activist investors who buy shares of companies then agitate for change they believe will unlock value.
That seems to be at least partially the case at Kraft, where noted activist fund managers Nelson Peltz and Bill Ackman have positions and expressed support for the breakup strategy Thursday, according to the Wall Street Journal. If those names sound familiar they should, as both have ties to other breakups this year.
Ackman is a major shareholder of Fortune Brands, and when the company initially announced its split plans in December it acknowledged the interests of his fund Pershing Square were among the factors. Peltz, meanwhile, endorsed Wendy’s sale of Arby’s after previously pushing for a sale of the entire company.
Another major Kraft shareholder is an uncommon name in breakup stories: Warren Buffett. The billionaire’s Berkshire Hathaway is the company’s largest shareholder, and Buffett made some noise last year about his displeasure with the issuance of stock to help finance the acquisition of British confectioner Cadbury.
In a note Thursday, Barclays Capital analyst Lazar wrote that a split of Kraft probably wasn’t possible before the Cadbury acquisition, but with the added scale from the deal the separation would create the world’s largest snack operation – bigger than PepsiCo’s Frito-Lay division.
For now, Lazar writes, Kraft management under CEO Irene Rosenfeld needs to focus on integrating Cadbury and realizing the cost and revenue synergies when the deal was made. Beyond 2012 though, if faster organic sales growth isn’t coming through, he expects the split into what he dubs “Growth Co.” and Yield Co.” to be an attractive alternative to create value.
Janney Capital Markets’ Jonathan Feeney said the spinoff makes sense and increases value, but is “not a game-changer,” and does not do much to change the earnings equation, though the grocery business could be attractive for a financial buyer down the road.
Kraft shares finished the day down 1.5% Thursday, after bucking the broader market’s collapse for most of the session before surrendering its gains.
- Bill Ackman
- Barclays Capital
- split plans
- Maxwell House
- Oreo cookies