Kraft Case Study

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The purpose of this Case Analysis Report is to advise Philip Morris on the Acquisition of Kraft Inc.


Kraft is a food-focused company with many well known brand names. In 1987 net sales were $9.9 billion which was an increase of 27% over the previous year., and net income increased by 11% to $435 million. This follows an earlier attempt to diversify where in 1980 Kraft merged with Dart Industries and then acquiring Hobart Corporation in 1981. However, by the end of 1986 Kraft had returned to a food-focused strategy.

Philip Morris is a company that is dependant on the tobacco industry. Most of Philip Morris’ income is from its Marlboro, Benson & Hedges, and Virginia Slim cigarette brands. Though tobacco sales have increased by 15 percent in 1987, Philip Morris wishes to diversify out of the tobacco business, as evidenced by their 1969 acquisition of 53 percent of Miller Brewing Company’s common shares with the remaining shares following in 1970, and their purchase of Seven-Up in 1978 and General Foods in 1985. These acquisitions have had mixed results, with Philip Morris selling its Seven-Up operations in 1986 and General Foods having a declining profit from 1986 to 1987 of $624 million to $605 million.

Why is Kraft a takeover target for Philip Morris

The food industry is a growing one. For Kraft, in 1987 net sales were $9.9 billion which was an increase of 27% over the previous year., and net income increased by 11% to $435 million. It is expected with an increasing population that the food industry will grow.

As Philip Morris is seeking to diversify out of the tobacco business and into the food industry, the acquisition of Kraft would strengthen their position as they would then become the largest food company in the world.

Kraft is internationally recognised with many well known brand names such as Miracle Whip, Seven Seas, and its range of Kraft salad dressings.

What has occurred thus far

On the 18th of October Philip Morris made a hostile tender offer to the shareholders of Kraft for $90 per share in cash, which was a 50% premium over the closing price ($60.125) on the 18th of October.

In response to this tender offer, Kraft Management have proposed a major restructuring plan as an alternative to the tender offer made by Philip Morris.

What is Kraft worth?
We need to value Kraft at the end of 1987 to determine whether the market has fairly priced the share prices of Kraft. The market values of Kraft as at 1987 closed at $48.25. In valuing the share price of Kraft there are several methods that can be used. These methods include the Corporate Valuation Model (CVM), the Adjusted Present Value Model (APV) and the Equity Residual Model. In our analysis we used both the CVM and APV model to find a valuation of Kraft’s shares at the end of 1987. In applying the CVM analysis, we valued Kraft’s share price at 1987 at $54.19, while the APV method produced a value of $52.79. Although these two methods provide different share price results, both still seem to be significantly higher than the market share price [please refer to Appendix 1-A on the assumptions and calculations used to derive these share price values] Clearly, one could argue that the market share price of Kraft is undervalued. [A comparative illustration of the share prices as per our own independent valuations and the market valuations can be seen in Appendix B-1.

[for an explanation of the calculations used to determine Kraft’s share price please refer to Appendix A-1, for tables and charts refer to Appendix B-1]

Should Philip Morris purchase Kraft

Philip Morris should indeed purchase KRAFT. Many economic benefits and inflow will arise due to this purchase. Quoting Hamish Maxwell the CEO of Phillip Morris, that “the acquisition of Kraft will result in creating the leading international food company.” Main driving forces are the benefits of synergy and revenue diversification.

Synergy is...
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