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Dealwatch: Kraft Foods

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Published February 15, 2008 at 12:34 PM
kraft.gifWarren Buffett is the latest confirmed investor to set his sights on Kraft Foods Inc. His Omaha-based Berkshire Hathaway Inc. bought 132.4 million shares of Northfield, Ill.-based Kraft, representing an 8.6% stake of the company. The stake was worth about $4.32 billion as of Dec. 31, according to a Feb. 14 regulatory filing. Kraft shares were up 5.53% to $30.93 by noon Feb. 15 on the news.

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Back in November, Kraft and activist investor Nelson Peltz were having a busy few weeks. Kraft Foods, in which his funds hold a 2.4% stake and where he has lobbied for change for several months, unveiled merger plans Nov. 15 for its Post cereals business and store-brand label provider Ralcorp Holdings Inc. in a tax-free deal worth $2.6 billion. Antitrust regulators approved the Ralcorp deal Jan. 29.

The Ralcorp deal followed an agreement between Peltz and Kraft whereby the food company said it would expand its board from nine to 11, adding two directors picked by the company and approved by Peltz, and several days after The Wall Street Journal first reported a deal with Ralcorp was imminent. (Separately, Peltz made an offer for hamburger chain Wendy's International Inc. Nov. 12. For more, see a related Dealwatch.)

Nearly two weeks after it came to light that Peltz might have some ideas about ways Kraft could unlock shareholder value, the company unveiled plans July 3 for a $7.2 billion deal for Groupe Danone's cookie business. (The deal won approval from the European Commission Nov. 9.) The news comes nearly three months after tobacco company Altria Group spun off the unit, and speculation was ripe that the Northfield, Ill.-based company, the No. 1 cookie maker in the U.S., could be hungering for a deal of its own. Analysts suggested in January a frenzy among foodies could be on the horizon. 

According to media reports in June, Peltz, who also had a hand in affecting a Cadbury Schweppes plc auction for its American Beverages unit, which turned into a spinoff, and last year a board shakeup at H. J. Heinz & Co., took a stake in the food group and was preparing to encourage the board to unload its Post cereals and Maxwell House coffee business, as brand names have suffered in this supermarket era of organic grocers and discount retailers. There was also speculation at the time Buffett was buying up Kraft shares. At that point, indeed, he had amassed nearly half his stake, The Deal's Peter Moreira noted Feb. 15, citing the latest filing.

Kraft partially exited the candy business -- excluding the sale of its chocolate operations -- two years ago when it sold its Life Savers and Altoids brands to Wm. Wrigley Jr. Co., and, according to a Chicago Tribune report April 6, was also thought to possibly have its sights on Cadbury's confectionary business.

FINDING THE SWEET SPOT

Terms of the Kraft spinoff, announced Jan. 31, called for shareholders to receive .7 of a Kraft share for every share held of Altria, formerly Philip Morris Cos. The Deal's Lisa Gewirtz-Ward noted that in a report based on interviews with food industry executives, one analyst suggests the spinoff of Northfield, Ill.-based Kraft could spark a dealmaking spree among food companies.

UBS analyst David Palmer said in a report that Groupe Danone, Cadbury Trebor Bassett or Ferrero SpA are possible acquisition targets for Kraft. ... He predicted that Kraft's share price will fall in 2007, causing it to invest in stronger brands and buy companies that could pump up the company's bottom line. And as Kraft starts to make acquisitions, its rivals will too. The report predicts that in three to five years a handful of global food companies -- likely to consist of Nestlé SA, Unilever, Kraft and PepsiCo. -- will exist to better work with large retailers such as Wal-Mart Stores Inc. Meanwhile, midsized companies with $10 billion to $20 billion in sales -- H. J. Heinz Co., Campbell Soup Co., General Mills Inc., Kellogg Co., Hershey Co., Wm. Wrigley Jr. Co., Danone and Cadbury -- will become acquisition targets, according to the report.

In the last few years, Kraft, the largest food maker in the U.S., struggled with slowing sales and undertook a reorganization to focus its portfolio on key brands. In July 2006, Kraft sold off its Minute Rice label to Spanish food group Ebro Puleva SA for $280 million, another move to trim holdings and concentrate on more premium products.

D-E-A-L-S

  • The deal came just weeks after Kraft announced plans to take the United Biscuits plc's Iberian holdings for nearly $1 billion.
    • At the time, Kraft said it would roll the brands into its own separate company and relinquish its 25% stake in the London-based biscuit maker. The deal also doubles Kraft's presence in Spain and Portugal and "brings home" to Kraft the European, Middle Eastern and African rights of such well-known brands as Ritz, Oreo and Chips Ahoy!, all of which were sold to United Biscuits in 2000.
  • In March, Kraft unloaded its Milk-Bone dog biscuits business to Del Monte, fetching $580 million -- a price tag that fell far short of the $1 billion figure one source had previously predicted and told The Deal in October.
    • The move was a politically correct one of sorts for Del Monte, as it came just weeks after it had announced grabbing Meow Mix Holdings Inc. from the Cypress Group LLC for $705 million.
  • In late December, Kraft Canada agreed to sell some of its grocery assets to a company owned by Sun Capital Partners Inc. and EG Capital Group LLC. The deal included Kraft's Primo pasta, sauce and tomatoes, as well as Ideal vegetables and Il Migliore and Roma food service pasta. Also included are the Canadian licensing rights for several Del Monte products, including canned fruits and vegetables.
  • In 2004, Kraft announced plans to sell off its yogurts unit to CoolBrands International Inc. for nearly $59 million.
  • Also in late 2004, Wm. Wrigley Jr. unveiled plans to spend $1.48 billion to take Altoids, Life Savers and other Kraft confections. The unit went for 10 times Ebitda.
  • Two years before, Kraft agreed to sell its Latin American Fleischmann's yeast and industrial bakery ingredients business to Australian yeast and natural foods supplier Burns Philp & Co. Ltd. in a deal worth $110 million.
  • In 2000, Kraft, which already owned the Slim-Fast franchise including its meal replacement bars, bought Rye Brook, N.Y.-based Balance Bar Co. for about $268 million at the height of the energy bar craze.

The company's just one of many peers to refocus its portfolio on core brands. For the play-by-play of Sara Lee Corp.'s transformation, see the Dealwatch executive summary.

WHAT'S INSIDE KRAFT'S PANTRY

A1 steak sauce KNOX gelatin
Kool-Aid Chips Ahoy! cookies
Oreo cookies Stove Top stuffing
Baker's chocolate Velveeta cheese
Crystal Light Miracle Whip mayo
Maxwell House coffee Country Time lemonade

MARKET RESPONSE

Kraft went public in 2001, opening to the tune of $31.50 per share, and they currently hover in the mid-$30 arena.--Carolyn Murphy

Dealwatch executive summary
The Date
The Action
2.14.08 Peltz's Kraft stake revealed.
11.15.07 Kraft unveils Post cereals sale.
11.12.07 Peltz offers to buy Wendy's.
11.09.07 Kraft and Peltz come to terms.
11.08.07 Kraft nears Post cereals sale.
7.03.07 Kraft takes Danone's cookies for $7.2 billion.
6.22.07 Peltz reportedly takes a stake in Kraft; has a turnaround plan.
4.06.07 Is Kraft hungry for Cadbury?
1.31.07 Altria plans Kraft spinoff. Kraft ends its first day of trade down 1.7%; Altria ends up 2.1%.
7.27.06 Kraft cuts rice from its diet for $280 million.
7.10.06 Kraft scoops up United Biscuits' Iberian brands for $1.07 billion.
3.16.06 Del Monte gobbles Milk-Bone for $580 million.
3.02.06 Del Monte pays $705 million cash for Meow Mix Holdings.
12.2005 Kraft Canada agrees to unhand several grocery assets up north.
10.2005 Kraft's Milk-Bone business is expected to fetch $1 billion.
12.2004 Kraft sells its yogurt unit to CoolBrands International for $59 million
11.2004 Wm. Wrigley Jr. says it will pay $1.48 billion for Kraft's confections.
10.15.02 Kraft announces it will sell its Latin American Fleischmann's yeast unit to Burns Philp for $110 million.
8.2001 Kraft tests public waters and barely budges from its opening price of $31.50 per share upon debut.
2000 Kraft boosts its energy bar holdings, paying $268 million for Balance Bar.
Source: The Deal


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