Chocolate and Cheese Don't Mix for Kraft

A mere 18 months after its acquisition of Cadbury, Kraft is essentially planning a reversal of the deal

Erin Lash, CFA 4 August, 2011 | 5:07PM
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A mere 18 months after its acquisition of Cadbury, Kraft (KFT) intends to split the business into global snacks and North American grocery, essentially reversing the confectionery deal.

We have been quite sceptical since the Cadbury transaction was announced regarding the qualitative aspects of the acquisition--that is, personnel retention--and we believe that today's announcement supports our thinking. Further, we now question the firm's ability to garner the targeted $1 billion in revenue synergies, since it will no longer be able to extend the distribution of some existing brands through Cadbury's network. From a cost perspective, because the integration was still in the early innings, we doubt the firm has realised substantial savings from the Cadbury deal that could reverse post-spin-off. However, we still think this deal could unlock some additional value for shareholders.

In our opinion, Kraft's motivation leans more towards unlocking a higher multiple for the faster-growing snack business that was being unappreciated when combined with the more mature North American grocery brands, rather than a strategic rationale. We doubt that either of the firm's business units will garner much interest from potential acquirers as the sheer size of the units (with global snacks' revenue at $32 billion and North American grocery's at $16 billion) makes them unlikely targets.

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Erin Lash, CFA  Erin Lash, CFA, is a senior stock analyst with Morningstar.