Kraft Foods Inc Chief Executive Irene Rosenfeld is breaking up the food giant, just 18 months after driving through the controversial acquisition of UK chocolate maker Cadbury.
The split will give investors the opportunity to bet on a snacks business that is growing quickly in emerging markets, or opt for the stable dividends offered by a slower growing general grocery business that includes Oscar Mayer lunch meat and Kraft cheese.
The move comes weeks after billionaire investor Nelson Peltz disclosed a 12.2 million share stake in Kraft. Peltz, whose Trian Fund Management holds the stake, supported Kraft's bid for Cadbury, in which he also owned a stake.
Both Peltz and Warren Buffett, another influential shareholder, supported the split, CNBC reported. Neither could immediately be reached by Reuters.
North America's largest packaged foods company said on Thursday that it expects a tax-free spin-off of the North American grocery business to be completed by the end of 2012.
The company, whose shares were up 3.25 percent at $35.41 in morning trading, also reported higher-than-expected second-quarter earnings and raised its full-year outlook.
Kraft is the latest consumer goods company to separate its units in order to focus them better and offer shareholders distinct investment opportunities.
Fortune Brands Inc, which also reported earnings on Thursday, Sara Lee Corp and Ralcorp Holding Inc are also spinning off units.
"It seems as though everyone is at the break-up game these days," Bernstein analyst Alexia Howard said in a research note. "We wonder if there is any read across here for companies like Campbell Soup Co or even H.J. Heinz."
Rosenfeld, on a conference call with analysts, declined to comment on potential acquisition opportunities.
GROWTH VERSUS MARGIN
A year and a half after buying Cadbury, Kraft said its snack business and North American grocery business now "differ in their future strategic priorities, growth profiles and operational focus."
The snack business, with annual sales of $32 billion, operates in high-growth emerging markets with products like Oreo and Lu cookies, Cadbury and Milka chocolates, Trident gum and Tang powdered drinks.
The Lu business, purchased from France's Danone, was another high-profile acquisition under Rosenfeld.
The North American grocery business, with annual sales of $16 billion, is focused in more mature markets but has high profit margins with products like Kraft, Velveeta and Philadelphia cheeses, Maxwell House coffee and Capri Sun drinks. That company will also include non-snack categories in Canada and Kraft's food service business.
Kraft said that Tim McLevish, who announced his resignation as chief financial officer in March, would now stay on and oversee the creation of the two companies.
Since the process is expected to take a year, Rosenfeld said it was too early to say who would run each business.
The split was an option the company and board had been considering for some time, she said. It was not immediately clear whether Peltz had anything to do with the decision.
CNBC said Peltz told the business news channel that he was "very supportive of management and board for coming to this decision."
Kraft was advised by Centerview Partners, Evercore Partners and Goldman Sachs.
EARNINGS BEAT, RAISES OUTLOOK
Kraft reported second-quarter adjusted earnings of 62 cents per share, topping the average analyst estimate of 58 cents, according to Thomson Reuters I/B/E/S.
Net revenue rose 13.3 percent to $13.9 billion. Organic revenue rose 7.1 percent, with price increases contributing 5.5 percentage points of that rise, and the rest coming from volume and mix of products.
The company also said it now expected 2011 operating earnings of at least $2.25 per share and organic revenue to grow by at least 5 percent.
Its prior forecast called for earnings of at least $2.20 per share and revenue growth of at least 4 percent.
Kraft said it expected its costs to rise by a low teen percentage rate this year, due to higher costs for fuel and commodities. It had earlier forecast a high single-digit increase.