Glenboden M & A Originations

Still a lot of downsizing divestments to come from Kraft

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Origination Status joint announcement of divestment of brands and business, August 2008;
Asset Maarud, Estrella and Taffel, market leading salted snack brands in Scandi and Baltic countries;
Buyer Herkules Partners (Norway), private equity firm covering Nordic region;
Seller Kraft Foods Inc. (USA), multinational food group;
Buyer Rationale consistent with investment strategy;
Seller Rationale refocusing of portfolio into core categories and brands;
NBs Since 2004, Kraft has shed about 10% of its total turnover through divestments
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In our view, Kraft’s divestment strategy is increasingly looking like a downsizing one. A basic look at the numbers shows us that Kraft can’t yet claim that its re-focusing has accelerated its growth rate. Combining that with a glance at its portfolio, it’s clear that there’s a lot more downsizing potential. We try to identify for you the categories that will be targeted.

Let’s summarise the divestments made by Kraft, since it recentralized its organization model at the end of 2003, and how large a chunk of the group’s total revenues they constituted. Our starting point is the $ 30 bln turnover reported in 2003. In the intervening period they sold the following (is decreasing order of contributed sales revenue : Post cereals (turnover of $ 1,1 bln), global sugar confectionery ($ 490 mln), Canadian grocery product brands ($ 300 mln), Milk-Bone pet snacks ($ 180 mln), Fruit20 and Veryfine fruit juices ($ 135 mln); plus national brands in yoghurts, desserts fruit snacks, grocery and cereals (combined turnover of about $450 mln).

So, in total Kraft has shed about $ 2,7 bln, or nearly 10% of its 2003 turnover. That would be fine if, as a result of it, the group was able to boast that it had ‘taken one step backward for two steps forward’ in terms of growth but, with an underlying CAGR of under 6% since 2003 (organic continued operations), that is hardly the case.

So, more divestments are likely. Which parts of the portfolio are most vulnerable ? Clearly those that are smaller, or slower growing, or have less premium or ‘better for you’ potential. That would mean upwards of 30% of total turnover. Kraft’s grocery products business is in decline, and yet it contributes 15% of total revenues. Kraft’s biggest category, snacks, contributed 30% and is clearly core, not least because it includes biscuits where the group acquired LU last year. On the other hand a significant chunk of that is salted snacks, which as this most recent divestment indicates is non –core. In addition Kraft’s convenience foods business, 15% of total revenue, is also hard to grow and increase margins.

Finally, Kraft is likely to still have a number of local brands around the world and, as its divestment history shows, there’s a strong trend to globalize its brand portfolio. With ‘seven brands with revenues of $ 1 bln’, that could mean an end game where Kraft is only half as big as it is now. It should really push its pipeline of compensating acquisitions in biscuits, coffee and processed cheese.

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