Why is Kraft splitting the company?

Kraft logo Pictures, Images and Photos Kraft announced yesterday that they are going to split the consumer packaged food giant in two. The plan is to have one company that consists of Kraft global brands like Oreo, Cadbury and a few others and another which will consist of the North American only grocery brands like Philadelphia Cream Cheese, Miracle Whip and others. Some are questioning why they decided to do this since all the brands are sold in the same grocery stores in North America and some sell in stores around the world?

The reason is to increase the value of each. North America is a mature market that is generally very consistent as a packaged food consumer, but will not be experiencing a high rate of growth. Everyone that buys Kraft products is already buying those products. For investors, this usually means slow growth and a high dividend for Kraft stock.

Their global brands however, like Oreo, Cadbury, Trident, among others are expecting to see much more growth in the coming years due to their presence in emerging markets around the world (Asia, Latin America, parts of Europe). For investors, the expectation would be a stock that keeps going up, up, up.

By splitting up the company in this way, the global brands company would see their stock rise much higher and the North American brands company would see more investment due to the consistency and dividend. Overall, the value it would add Kraft in investment would be higher than it is today as a single company. At least this is the plan.

It sounds like a good idea for the long term because it does make a lot of sense. The way Kraft is structured right now does give it some synergies, especially in North America, but they probably figure that the potential added value of splitting the company outweighs the potential loss of synergies they enjoy right now. Time will tell how this strategy will work for them in the future.