Tax Free Spin-Off of Kraft Foods - Analyst Blog
May 21 2012 - 4:51AM
Zacks
Kraft Foods, Inc. (KFT) recently announced that
the U.S. Internal Revenue Service (“IRS”) issued a ruling which
approves the tax free status to its pending spin-off into two
independent public companies.
Kraft Foods is in the process of separating into two independent
public companies: a high-growth global snacks business and a
high-margin North American grocery business. Global snacks will
consist of the current Kraft Foods Europe and Developing Markets
units as well as the North American snacks and confectionery
businesses. The North American grocery business would consist of
the current US Beverages, Cheese, Convenient Meals and Grocery
segments and the non-snack categories in Canada and Food Service.
The spin-off is expected to be completed before the end of this
year.
Following the spin-off, the North American grocery business,
which includes popular brands like Oscar Mayer meat and Kraft
cheese, will be an independent, public company and will be called
Kraft Foods Group, Inc. The Global Snacks unit will be named
Mondelez International, Inc.
As per the ruling which will confer tax free status to the
spin-off, neither the shareholders nor the company will be taxed on
distribution of shares of the new grocery company, Kraft Foods
Group. Any cash paid to set off the fractional shares will be
taxable as capital gain to the shareholders.
Our Recommendation
We currently have a Neutral recommendation on Kraft Foods. The
stock carries a Zacks #3 Rank (a short-term ‘Hold’ rating).
Overall, we are encouraged by Kraft’s strategy of continued cost
management, price increases, expansion into emerging markets and
continued strong momentum from its designated Power Brands.
Further, the split of its North American business is expected to
allow Kraft to focus on its distinct strategic priorities and
allocate resources optimally. However, we remain concerned about
rising input costs and vulnerability to currency translations.
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