‘Hugely significant’ Kraft move could signal M&A shift, says expert

Subject to board approval, Kraft will split its operations into a global snacks business and US grocery business by the end of 2012.

The former will incorporate Trident gum, Oreo biscuits and Cadbury. US grocery operations will include Kraft, Philadelphia cheeses and Capri Sun.

Describing the move as "hugely significant", ​Rollits corporate finance partner Julian Wild told FoodManufacture.co.uk that Kraft’s logical next step could be to divest the US business.

“The North American business would be interesting to private equity, since it is mature, cash-generative and well developed,”​ he said.

“Global snacks and Cadbury would then be more interesting to Kraft and has real global potential.”​

Wild said that such a move could follow on from Procter & Gamble’s (P&G’s) exit from the food sector with the sale of Pringles to Diamond Foods for $2.35bn (£1.44m) in May 2010.

He said the market could now follow a similar sort of push towards demergers seen in the late 1990s, where food firms such as Northern Foods steered a divestment course in order to focus on more specific areas.

“It could happen to Unilever, and it arguably could also happen to Campbell’s and Heinz,” ​Wild added.

Unilever speculation​

But analyst Graham Jones, director of equity at stockbrokerage Panmure Gordon, told FoodManufacture.co.uk that he believed Unilever had “no plans whatsoever”​ to demerge or sell its food business, despite media speculation.

Investment bank Liberum Capital said in a note a fortnight ago that it expected Unilever to fund a large household and personal care acquisition by selling off its food unit, excluding ice cream and beverages at around x1 sales (about €14bn or £12.3bn).

Unilever’s four business units are: Home Care; Personal Care; Savoury, Dressings & Spreads; and Ice Cream and Beverages. Its food brands include Knorr, Flora, Magnum and Lipton.

However, Jones noted that Unilver’s food business was gaining traction in emerging markets. He said that a divestment of savoury, dressings and spreads made “no​ economic sense​” at x1 sales, especially given strong operating margins.

Nonetheless, Jones noted that companies such as Unilever would always have “non core”​ food businesses or brands to sell. The group simply wasn’t interested in ploughing money into recent divestments (and tired brands) Chicken Tonight and Ragu, he added.

“Look – Unilever has a global turnover of €44bn [£38.54m] so they’ve got bigger battles to fight than turning around Chicken Tonight,”​ he said.

Neil Worsley, partner at corporate finance firm Ford Campbell, said: "Food groups in general​ will always merge, be acquired or divested​."

Worsley said his company was aware of a movement towards functional and/or nutritional foods. Recent discussions with Nestle had revealed a "clear corporate strategy to look beyond traditional confectionery"​, as had the Swiss giant's August 2010 purchase of Liverpool medical nutritional firm Vitaflo.

Adding bandwidth​

Meanwhile, PepsicCo UK's recent £8.5m investment in porridge manufacturing, and Coca-Cola's April 2010 acquisition of a majority stake in Innocent Drinks, showed an increased interest in healthy products across the industry, Worsley said.

Given this climate, he said a Kraft divestment and focus on less obviously healthy products such as gum and confectionery alone would surprise him.

Both large corporate and trade clients were looking for smaller, high-margin food businesses to "add bandwidth and cover up any cracks"​, Worsley said.

He added that 'quasi-pharmaceutical' functional food or health supplement firms operated in an interesting space, with pharmaceutical firms lobbying for product health claims on nutritional supplements, for instance, to be verified.

However, despite European Food Safety Authority (EFSA) strictures, Worsley noted that such products didn't involve the same expense in terms of clinical trials as drugs.

This had led to an 'if we can't beat 'em, join 'em' attitude from the pharma sector, he suggested, exemplified by GlaxoSmithKline's (GSK's) acquisition of sports nutrition firm Maxinutrition last December for £162m.