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Altria sets terms for Kraft plan: Many investors ready to sell as spinoff looms
(Chicago Tribune (KRT) Via Thomson Dialog NewsEdge) Jan. 30--Altria Group Inc. is expected on Wednesday to announce the terms of the long-awaited spinoff of its stake in Kraft Foods Inc., prompting many shareholders to line up their exit positions in the foodmaker.
Several analysts predicted Monday that shares will fall in the short term, saying Northfield-based Kraft will need to present a clear plan for growth before it will become attractive to investors. Kraft's new chief executive, Irene Rosenfeld, is expected to present her plan at an analysts conference next month.
Altria owns more than 88 percent of Kraft, the largest maker of food products in the United States, and is expected to disburse shares among Altria shareholders.
David Nelson, an analyst with Credit Suisse, predicted in a note to investors issued last week that "a large portion of Altria shareholders will choose to sell the Kraft shares they receive rather than hold them."
More than 31 million shares, or nearly 7 percent, of Kraft's stock had been shorted by people betting the stock will fall once it is spun off, according to Capital IQ, a division of Standard & Poor's.
In addition, more than 26,000 put options have been purchased at $30 by people seeking to hedge against the possibility that Kraft's stock, trading above $35, could drop below $30 per share.
"The volatility is going to be up front in Kraft's stock," said Greggory Warren, an analyst with Morningstar. "People are going to sell it right away or are going to short it now rather than waiting."
Despite that activity, shares of Kraft stock rose 1.8 percent Monday, to $35.17.
Altria, which has delayed the spinoff until the "litigation environment improved" with regard to tobacco lawsuits naming its Philip Morris USA unit, said last fall that recent favorable decisions cleared the way. Giving Kraft's Rosenfeld enough time to get acclimated was also a consideration.
Rosenfeld became CEO in June. She had a long career at Kraft, rising to president of Kraft Foods North America before leaving briefly to become chairman and chief executive of Frito-Lay, a division of PepsiCo.
Eric Katzman, an analyst with Deutsche Bank, said he expects Kraft's shares to trade at around $32 once the dust settles following the spinoff.
But, he said, even that could be problematic if Kraft is unable to generate sales volume. Like many packaged-food companies, Kraft generates huge, steady revenues but has been unable in recent years to push sales significantly higher to show the growth that Wall Street demands.
"As CEO Rosenfeld has noted, the new-product pipeline is weak, with no short-term solution," Katzman said.
"So while cost savings and currency look favorable, it is the top line that is key in our view to get the stock performing above the peer group for a sustained period."
David Driscoll, an analyst with Citigroup, said he hopes Rosenfeld can bring focus.
"Frankly, we believe Kraft's broad and disparate collection of categories and brands has been unwieldy during the past few years as Kraft has seemed like a company struggling for an identity," he said. "We believe the lack of focus has hurt new-product development and the ability to generate compelling, incremental new product ideas."
While shares of Kraft have climbed higher since Rosenfeld's appointment, sales at the company have not performed as well as she would like.
When the company reported third-quarter results, she said she "was not really pleased at the overall [sales] performance" or the effort to develop new products.
Sales during the quarter rose only 2.3 percent, to $8.2 billion, short of the $8.3 billion that was expected by Wall Street.
In addition, Rosenfeld said, the new-product pipeline was in dismal shape.
Despite her criticism, Kraft earnings for the quarter did exceed analyst expectations. For the quarter that ended in September, Kraft said its net income was $748 million, compared with $674 million a year earlier.
Altria shares rose 6 cents to close at $88.06 Monday on the New York Stock Exchange.
jschmeltzer@tribune.com
Copyright (c) 2007, Chicago Tribune
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