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Kraft’s spinoff math adding up, for now

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Mergers are designed to prove that 1 + 1 > 2. Conversely, bosses and bankers argue, spinoffs can prove that 1 = 0.6 + 0.6. This is math for optimists. Alas, in the separation of old Kraft (including Cadbury) into new Kraft and Mondelez, effected six months ago, standard arithmetic holds so far.

The idea was to create a low-growth, high-yield, cost-focused North American packaged food company and a faster-growing international snacks, candy and coffee business. This "bifurcates the investor base" into growth and value, giving Mondelez a higher valuation, and brings "focus." that is, optimal allocation of human and financial capital in each business.

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Before the split, old Kraft had an enterprise value (market capitalization plus net debt) of about $96-billion (U.S.) and its shares traded on a multiple of forward EV to earnings before interest taxes depreciation and amortization of just under 10 times. New Kraft and Mondelez together have an enterprise value of about $105-billion, and trade on 11 and 12 times EBITDA. That is to say, the pieces are now about 10 per cent more valuable than the whole was. Sounds good, until you remember that over the past six months consumer staples' shares generally are up about 10 per cent, and many food companies (from Hershey's to General Mills) have done much better than that.

The split may yet prove itself. The U.S. economy has done well relative to the wider world in recent months, making a premium for Mondelez hard to achieve (especially when it derives 40 per cent of its sales from recessionary Europe). There are also rumours that an activist investor is interested in trying to force together Mondelez and PepsiCo's snacks business. This, however, risks creating a snacks conglomerate of unmanageable size. But then a future spinoff or two would solve that problem, surely?

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