Why Did Kraft Sell Frozen-Pizza Cash Cow to Nestle?

Deal Gives Food Giant Additional Cash to Pursue Cadbury -- and Possibly Freeze Out Rival in Bidding

By Published on .

CHICAGO (AdAge.com) -- Kraft Foods might have moved a step closer to acquiring Cadbury, raising dough for a bid by selling its thriving frozen-pizza business to Nestle for $3.7 billion. But the move raises a prickly question: Why does Kraft want to trade pizza for chocolate?

Kraft's DiGiorno is by far the leader in the frozen pizza aisle.
Kraft's DiGiorno is by far the leader in the frozen pizza aisle.
One reason is distribution. "It's a good business, and it's doing well. We've made great progress, and that's why Nestle was interested," said Kraft spokesman Mike Mitchell. However, for Kraft, pizza had more limited global potential than confectionery. "We're looking to focus on products where we can bring global scale," he said, and since the pizzas are frozen, "it would be difficult to leverage globally." As Kraft has shaped its product portfolio since the 1990s -- it once marketed such brands as Budget Gourmet, Bird's Eye and Breyer's ice cream -- it has winnowed out products that are shelved in the freezer case. Today, Mr. Mitchell said, pizza is Kraft's "only meaningful frozen product."

And it's certainly meaningful. Kraft elevated the $3.2 billion frozen-pizza category over the last decade from cheap dinner of last resort (cardboard-tasting dough and plastic-looking cheese) to a viable takeout rival. Kraft's DiGiorno, with its tagline "It's not delivery, it's DiGiorno" from DraftFCB, Chicago, is by far the leader in the frozen-pizza aisle, with $606 million in sales for the 52 weeks ended Nov. 29, according to Information Resources Inc. Moreover, even during the recession, DiGiorno was trouncing private label, which in aggregate is a distant second in the category with $314 million in sales. Tombstone, another Kraft brand, is third, with $259 million in sales.

Corporately, Kraft -- which also markets the California Pizza Kitchen, Tombstone and Jack's brands -- holds a commanding $1.2 billion in frozen-pizza sales, or about a third of the total category (excluding Walmart and club-stores). But by that measure, Kraft's grocery sales are nearly twice those of closest-competitor Schwan's, with $732 million. The new buyer Nestle, which sells frozen pizza through its Lean Cuisine and Stouffer's, currently ranks fourth with $221 million in sales.

In selling its pizza businesses, Kraft is betting big that its confectionary brands will see higher growth in years to come.

Cash on-hand
The sale would seem to give Kraft cash to raise its bid for Cadbury, as the company's offer has been derided as being too heavily funded by Kraft stock. Another sweetener: In pursuing Kraft's pizza business, Nestle's craving for Cadbury seems to have been curbed. In a research note, Stifel Nicolaus analyst Christopher Growe said Kraft may have shooed away two competitors with one sale.

"With Nestle out of the picture, we believe the chances of Hershey as a potential suitor of Cadbury are reduced," Mr. Growe wrote. "The most likely scenario for Hershey to make a bid for Cadbury was through a partnership with Nestle. Clearly the company has considered going at it alone, but we believe ultimately the Hershey Trust will decide to take a pass."

Kraft has executed a series of public relations maneuvers throughout its Cadbury bidding process, setting up a dedicated microsite, web videos and making PR professionals available nearly round-the-clock. The company has also been remained visible at investment conferences, and conducted a series of cause-marketing programs.

Even a warning from Warren Buffet yesterday appeared to pay dividends. Mr. Buffett's Berkshire Hathaway, which is Kraft's largest shareholder, warned the company about funding the purchase largely with stock. Based upon the expectations that values will increase, it could be "authorizing a huge transaction without knowing its cost or the means of repayment." While Mr. Buffett was clearly asking the company to come up with more cash to fund the sale, he also protected the company from expectations that it will raise its bid. Cadbury's share price slipped 3% following the statement.

In this article:
Most Popular