Spin Off Opportunity with Kraft Foods Group?


If you are unfamiliar with spin offs, you are not the only one.

Spin offs fall into the category of special situations investingand is one area that value investors can profit from by taking advantage of temporary market mispricing.

What is a Spin off?

To quickly bring you up to speed, spin offs are where a company separates a subsidiary or business division into a new company. A spin off usually occurs because the company wants the public to fully recognize the underlying assets of the division and to get a better valuation of the whole company.

The newly created company is then valued by the market independently.

That last sentence is why people invest in spin offs. To purchase a child company before the market comes around to understanding the full value.

Read this prior article if you want a more detailed discussion of spin offs.

With that introduction on spin offs out of the way, here is a guest submission on Kraft Foods’ October 1 spin off.

Spin Off Opportunity with Kraft Foods Group?

Kraft Food INC. operates one of the largest food and beverage companies in the world. They manufacture and market food and beverage products, including “TV dinners”, beverages and coffee, cheese and other grocery products, primarily in the United States and Canada.

On, October 1, 2012, Kraft Foods Inc. will split off its North American segments. The North American grocery business will then trade under the name “Kraft Foods Group Inc.” and will have a new ticker symbol of “KRFT”. Kraft Foods Inc. will then change its name to Mondelez International.

The old “KFT” ticker will be retired and replaced with “MDLZ”.

The company will distribute one share of the new KRFT for every three shares of KFT. Fractional shares will be sold and the cash will be sent to you.

Why Are They Separating?

Management believes:

The Spin-Off will allow each company to focus on its distinct growth profile, product categories, distribution systems and strategic priorities, with customized cultures, organizational structures, operating models and financial targets that best fit its own business, markets and unique opportunities.

The Spin-Off will allow each company to allocate resources and deploy capital in a manner consistent with its distinct operational focus and strategic priorities in order to optimize total returns to shareholders.

The Spin-Off will allow each company to allocate resources and deploy capital in a manner consistent with its distinct operational focus and strategic priorities in order to optimize total returns to shareholders.

In layman’s terms the Mondelez branch will likely grow at a faster rate than the North American branch. The Kraft Food group (from here on referred to as KRFT) will retain the Kraft name, which I believe will help keep the revenues stable.

Keep in mind that Groceries are bought in weekly intervals, and snacks and candy, are bought at irregular and intermittent intervals. They are two different companies with two different business models, going in different directions.

Will Insiders Want the Stock?

Simply put the KRFT isn’t going to be a small company, only smaller compared to Mondelez International. The directors are not being attached to a sinking ship; they are getting the keys to a new yacht to which they will be able to unleash all of their entrepreneurial energy.

Another point, the new CEO, W. Anthony Vernon, will have a base salary that is relatively small compared to Kraft peers, which include the likes of Pepsi, and Cola-Cola.

In our case, the more options the better, as far as the directions and executive officers go:

The signs point toward the “insiders” and the shareholders values being aligned together.

Will Institutions Want the Company?

This is the part that gets tricky.

A lot of the time after spin offs, institutions don’t want or can’t hold on to the spin off. In the case of KRFT, and MDLZ they are both going to be pretty large companies (18.b and 32.b) so the big institutions may not be selling off their stack like we would like in this case.

However, as of the 24th, of September KFT, is no longer in the DOW average, so indexes that track the DOW are going to be forced to sell of their KFT shares.

I want to say that institutions will sell the spin off, but signs are pointing in the other direction.

Summary

As a spin off, KRFT is looking like a rather plain, big non-distressed company that grosses a little bit over 18 billion a year.

Because of the size of the spin off and its parent, there are a lot of eyes on this situation.

As a spin off, this company may be on the pass list just because it may be fairly valued right out of the gate.

However, while both companies are not exactly what I look for in a spin off (I like less coverage, but doesn’t every value investor?) they both have the makings for a fine Buffet style buy and hold investment.

Both have very diverse lines of products, both will be paying very good dividends, and both are fairly easy to understand.

If (and that’s a big if) a big sell off happens by the institutions you may be looking at a pretty simple and cheap stock.

References

Download the original PDF of this article

The 10 Form and its companions: http://goo.gl/2cXpW

A great write up of this spin off: http://seekingalpha.com/article/873411-kraft-spin-off-101

To find all the KFT news: http://www.stockspinoffs.com/tag/kft/

If you want to learn more on special situation investing: http://goo.gl/F56un

Get to know me: https://twitter.com/simpleandcheap

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  • Thank you Jae for putting up my report. As it turns out the spin off was included in the SP 500. So the little hope we had of any forced selling is all but gone. Although KRAFT food group inc, was have a very good dividend so for all of you dividend guys, you may want to take a look at this not so secret spin off
    – johnny

  • Thanks for the article. There is still a little hope that maybe those that hold do not want to be overweight with more than 1 company from an industry. Slim chance, but we’ll see. Maybe it will sell off for another reason.

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