Kraft Updates: Debt Issues Pre-Spinoff, Enters Carbonated Drinks Market

Kraft Foods (NYSE:KFT), which will spin-off into North American Grocery division and Global Snacks division this year, issued $800 million of floating-rate notes in the first week of January before it starts its spinoff. ^[1] Although the company has made strategically sound moves recently including forging a relationship with SodaStream to enter into the carbonated drinks segment, the debt levels may stymie the growth prospects. Furthermore, the debt getting disproportionately transferred to one of the divisions will be detrimental for the respective division. Kraft competes with players like PepsiCo (NYSE:PEP), General Mills (NYSE:GIS) and Kellogg (NYSE:K).

See our full analysis for Kraft here

How Will Kraft Split the Debt?

Kraft has more than $3.5 billion worth of bonds maturing this year and it will need to cut debt if it wants to improve its credit rating. Moody’s has a Baa2 rating for Kraft, i.e. two steps above junk. ^[1] Currently, Kraft has around $30 billion in debt, a large part of which was undertaken to acquire Cadbury. The company has not revealed how this debt will be divided after the spin-off. Going forward, the company will need to make investments, especially in developing countries. A worsening credit rating will increase the interest expenditure which can potentially put a dent on its profitability.

Kraft Partners With SodaStream

Kraft has tied up with Israel’s SodaStream International which will enable the U.S. company’s branded flavors be made available with SodaStream’s soda makers. This is the first time that Kraft’s flavors will be available for use in a carbonated beverage. As the overall demand for Carbonated Soda Drinks (CSD) is decreasing in the U.S. due to consumers showing a predilection for healthier products, the company is cautious enough to introduce ‘Diet’ and ‘All-natural’ products initially. Kraft will introduce Crystal Brand, a women’s diet beverage, and Country Time, the lemonade beverage. ^[2] The carbonated soda market is highly competitive in the U.S. so don’t expect Kraft to take a significant market share.

This is just one of the many strategically smart moves Kraft has been involved recently including partnering with Intel to introduce sampling machines and a renewed focus on Philadelphia Cream Cheese, which has kept the stock price buoyed.

We currently estimate a $34.68 price for Kraft Foods, which is about 7% below the current market price.

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1. Kraft Sells $800 Million of Bonds for Refinancing Before Spinoff, Bloomberg, January 6, 2011 [↩] [↩]
2. Kraft Foods and SodaStream Enter Strategic Co-Branding Deal, foodingredientsfirst.com, January 6, 2012 [↩]