Special Situation Investing

Wednesday, January 31, 2007

Altria Group (MO) to Spinoff Kraft (KFT)

Altria Group has finally announced that they will be spinning off the remaining chunk of their Kraft ownership (88.9% of outstanding shares). Nothing new here as they have been talking about it for years. The spinoff is to happen on March 30.

From the article:

We continue to view the spinoff of Kraft as a wonderful thing for Altria shareholders but an extremely disruptive event for Kraft shareholders," wrote D.A. Davidson & Co. analyst Timothy Ramey in a research note.

The analyst said that the more than $50 billion of Kraft equity will need to find a home all at once, likely causing an extended oversupply of the company's shares.

"It is such a huge amount of equity, equal to about 40% of all the market capitalization of slow-growth large-capitalization food companies currently owned by institutions and investors," Ramey added.


The spinoff also frees up Kraft to pare its portfolio more aggressively. The company has been shedding businesses to focus on core categories such as biscuits, cheese, coffee and refrigerated beverages.

now has a strong buy rating on MO and strong sell on KFT.

If I was a gambling man I would probably buy June MO calls and June KFT puts but such short-term speculation just is not my style.

If anything, I will just sit and watch this one out. If KFT really does get nailed post-spinoff then at some point I would definitely buy. However, at current prices the company seems fairly valued. Kraft is low-growth, already has a ton of debt and expenses are going to rise post-spinoff due to fewer shared costs. The only thing I'll give the company is that margins aren't bad. I am actually fairly sceptical that you will see the much prophesized selling in Kraft shares, given the massive liquidity in the system right now.

Anyways, March 30 is the day, keep an eye on it.


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