2. TABLE OF CONTENTS
EXECUTIVE SUMMARY 3
COMPANY OVERVIEW 3-4
COMPETITOR OVERVIEW 4
GLOBAL GROWTH STRATEGY - “HITTING OUR SWEET SPOT” 4-5
OREO IN INDIA: MARKETING ANALYSIS
TARGET SEGMENT 5
POSITIONING 6
MARKETING MIX (PRODUCT, PLACEMENT, PROMOTION, PRICING) 6-8
COMPETITOR ANALYSIS 8
KRAFT IN INDIA: FUTURE MARKETING STRATEGIES
NEW PRODUCTS 8
INNOVATION 8-9
ACCOUNTING
INCOME STATEMENT ANALYSIS 9
BALANCE SHEET ANALYSIS 9-11
VALUATION
DISCOUNTED CASH FLOW (DCF) ANALYSIS 11
CONCLUSION 12
APPENDICES
A. NET REVENUE BY OPERATING SEGMENT (2006, 2010) 13
B. HISTORY OF MERGERS, ACQUISITIONS & NAME CHANGES 14
C. NET REVENUE BY CONSUMER SECTOR (2006, 2010) 14-15
D. 11 $1 BILLION KRAFT BRANDS 15
E. 54 KRAFT BRANDS 16
F. KEY COMPETITOR ANALYSIS 17
G. HISTORY OF NEW PRODUCT INTRODUCTION (DOMESTIC) 18
H. SWOT ANALYSIS: KRAFT FOODS, INC. 19
I. SWOT ANALYSIS: CADBURY 19
J. SWOT ANALYSIS: OREO IN INDIA 20
K. EXAMPLE: OREO IN CHINA 20
L. INCOME STATEMENT: FORECASTING VARIABLES 21
M. INCOME STATEMENT (2008-2010 REAL, 2011- 2015 FORECASTED) 21
N. KRAFT OPERATING PROFITS BY SEGMENT 22
O. BALANCE SHEET: FORECASTING VARIABLES 23
P. BALANCE SHEET (2008-2010 REAL, 2011- 2015 FORECASTED) 24
Q. COMPOSITION OF DEBT 25
R. HISTORICAL CAPITALIZATION 26
S. LONG TERM AMORTIZATION TABLE 27
T. CAPITAL STRUCTURE DETAILS (2008, 2009) 28
U. HISTORICAL CASH FLOW 29
V. DISCOUNTED CASH FLOW MODEL - KRAFT 30-31
W. CAPITAL STRUCTURE 31
X. EARNINGS PER SHARE (EPS) 32
Y. KEY RATIOS 33
Z. MARKET CAPITALIZATION 34
AA. KEY EQUITY MULTIPLIERS 35
BB. KRAFT DEBT SCHEDULE 36
CC. NOTES TO WACC CALCULATION 36
DD. BETA CALCULATION: KRAFT 37
EE. BETA CALCULATION: COMPARABLES 37
FF. BETA CALCULATION: COMPETITORS 38
SOURCES 39-40
2
3. EXECUTIVE SUMMARY
With its well-publicized acquisition of Cadbury in February 2010, Kraft gained access to the
British confectioners‟ extensive network of distribution channels in developing markets in Africa and
Asia. Declining domestic sales and the maturity of North American markets makes success abroad of
critical importance to the company‟s future. In addition, Kraft is targeting high margin categories such as
snacks, confectionary and quick meals for growth. The company‟s long-term growth strategy is to
position itself as a “global snacks powerhouse.”1
In order to accomplish this strategy successfully and sustainably, Kraft should:
employ a locally-focused marketing strategy in launching Oreo in India, and be conscious of
Indian consumers‟ tastes, buying preferences, and price sensitivity.
use successes and failures from the Oreo launch to develop best practices for other large-scale
product introductions in developing markets
manage its significant long-term debt through further restructuring, and avoid investing
activities that would increase its long-term debt
COMPANY OVERVIEW
Kraft Foods, Inc. is the world‟s second largest food company. 2009 revenues from its three
operating segments – Kraft Foods North America, Kraft Foods Europe, and Kraft Foods Developing
Markets - exceeded $40.4 billion. With respect to percentage of total revenues, Kraft is experiencing
significant growth in international markets (see Appendix A). The company currently has approximately
97,000 employees worldwide and sells its products to consumers in over 160 countries. Domestically,
Kraft products are present in more than 99% of American households.
Kraft‟s brands span six consumer sectors: Snacks, Beverages, Confectionary, Cheese, Grocery
and Convenient Meals. In February 2010, Kraft finalized its $19.5 billion acquisition of Cadbury, the
world‟s largest confectionary company (see Appendix B). While in 2006 Snacks and Beverages were
Kraft‟s two largest sectors, today Confectionary and Snacks are, and generate 51% of its revenues (see
Appendix C).
1
Kraft Foods, Inc. Annual Report. 2009. 25 February 2010. <http://www.sec.gov/>
3
4. 11 of Kraft Foods‟ brands annually earn more than $1 billion worldwide: Kraft cheese, Cadbury,
Oscar Mayer, Maxwell House, Nabisco, Oreo, Philadelphia Cream Cheese, Jacobs, Milka, LU, and
Trident (see Appendix D). Kraft maintains focus on its “unrivaled portfolio of brands people love,”2 as
more than 80% of its revenues come from products that hold the number one share position in their
respective categories.
Kraft‟s capital structure is 64.1% equity and 35.9% debt. Its operating margin is currently
13.69% (EBIT/revenue). Kraft is a high yield dividend-paying company offering 3.70% dividend yield.
Its earnings per share ratio (EPS) is currently 2.09.
COMPETITOR OVERVIEW
Given Kraft‟s large portfolio of brands (see Appendix E) and range of products, it faces
competition from domestic and international companies, smaller regional companies, and generic brands.
Some of Kraft‟s key competitors are Nestle, Pepsi-co, Coca-Cola, Danone, and Heinz. As Kraft moves
forward with its plan to capture market share in developing markets, it must be aware that several of its
competitors have similar growth strategies. For example, Coca-Cola has named Mumbai one of the cities
most important to its growth and Nestle touts its commitment to Middle East operations after opening a
$136 million manufacturing plant in Dubai (see Appendix F).
GLOBAL GROWTH STRATEGY - “HITTING OUR SWEET SPOT”
Seven months after acquiring Cadbury, Kraft announced a new global growth strategy. Centered
on marketing leading consumer brands (see Appendix G) and pursuing growth opportunities consistent
with consumer trends, this plan will ultimately increase shareholder value. Kraft‟s CEO Irene Rosenfeld
proclaimed that at Kraft, “we‟re hitting our sweet spot.”3
The plan builds on a set of four long-term strategic priorities, stated in the company‟s February
2010 10-K filings. These four priorities - focusing on growth categories, expanding footprint in
2
Kraft Foods, Inc. Quarterly Report. 2010. 6 August 2010. <http://www.sec.gov/>
3
“Kraft Foods Lays Out Its New Global Growth Strategy.” Kraft Foods News Center. Kraft Foods, Inc. 15
September 2010. Web.
4
5. developing markets, expanding presence in instant consumption channels, and enhancing margins – are
intended to further transform Kraft into a leading snack, confectionary and quick meals company.
This focus on high cash flow segments and instant consumption channels will help fund Kraft‟s
growth in developing markets, which it predicts will make up one third of its business by 2013. Strategic
estimates aim for organic revenues growth of 5% or more, margins in the mid- to high-teens, and EPS
growth of 9-11%.
Kraft will implement these strategic priorities through the introduction of core brands into
emerging markets. A prime example is its planned full-scale launch of Oreo biscuits in India, which can
be used as a litmus test for future product introductions in similar markets (see Appendices H-J). The fact
that the company incurred an important amount of debt in acquiring Cadbury places even greater
importance on the success of Kraft‟s global growth strategy.
OREO IN INDIA: MARKETING ANALYSIS
India represents perhaps Kraft‟s most promising developing market, with its ballooning
population and growing consumer base. Distribution of Oreo biscuits in India is currently limited, and
the brand is primarily sold through import stores. Kraft has yet to fully launch Oreo using its newly
acquired Cadbury distribution network, but plans to do so within the next year. This analysis presents a
go-to-market strategy for Kraft‟s Oreo in India initiative and could be used as a model for how Kraft can
introduce its products into other developing markets in the future.
TARGET SEGMENT
The primary target segment for Oreo in India should be urban professionals between 24 and 39
years old. Based on India census data, this market consists of 32 million individuals. In addition, Kraft‟s
access to Cadbury‟s urban distribution network makes this target market accessible and actionable.
More importantly, this segment is differentiable by its snacking habits. This target customer has
a rising income, fast-paced lifestyle, and irregular work schedule, which leads to a greater likelihood of
snacking. For example, an Indian call center worker recently stated that “[s]nacking has become a part of
the call centre work culture. Since I work through the night, I always have either chips or wafers with me
5
6. on my desk to keep me active and fresh. It also gives me a chance to enjoy a quick break from work. And
that's what my colleagues do too."4
POSITIONING
Although snacking is a part of Indian culture, it has traditionally been associated with leisurely
consumption. However, the purpose of snacking is changing as customers seek snacks that are
convenient, satiating, tasty, and easily portable for on-the-go consumption. Kraft should emphasize
Oreo‟s sweet taste and ability to stave off mid-day or late-night hunger.
The positioning statement for Oreo should therefore be: „For urban Indian professionals who
want a snack, Oreo is a biscuit that is sweet, tasty, and provides energy to get through the day.‟
PRODUCT
Kraft plans to introduce the standard American Oreo to the Indian market. However, the
company should be cognizant of Indian tastes and how they differ from those of American consumers;
and it should utilize test markets to gauge consumer preferences for Oreo biscuits before implementing a
full-scale launch.
For example, when Kraft launched Oreo in China, its sales initially flat-lined because the
traditional recipe was too sweet for Chinese consumers. Kraft then tested 20 reduced sugar versions
before settling on a new formula. In addition, the original package size was too large for Chinese
consumers, and so Kraft introduced a new, smaller package size. With these two product adjustments,
Oreo revenues doubled within two years (see Appendix K).
With this in mind, Kraft should be particularly attentive to the market‟s reaction to Oreo, and be
prepared to quickly make changes to the Oreo recipe should it not pique consumer tastes.
PLACEMENT
Kraft should maximize distribution in two types of Indian retail food outlets: mom-and-pop
stores known as „kirana‟ and convenience stores.
4
Caul, Mhunna. Personal interview. November 2010.
6
7. Oreo‟s target customer traditionally purchases snacks through these channels, which are highly
accessible and already permeated by Cadbury.
The retail food market in India is highly fragmented. The traditional channels for fast-moving
consumer goods (FMCG) include general stores, convenience stores, hand cart vendors, and „kirana‟. Of
the 12 million retail food outlets in India, 7.3 million sell FMCG and 41% are in urban areas. Through
Cadbury, Kraft has obtained access to 1.2 million of these outlets.
Looking at how a customer would purchase Oreos supports this recommendation. Interviews
with people representative of Oreo‟s target segment along with observation indicate that „kirana‟ and
convenience stores are the primary outlets for snack purchases.
PROMOTION
Given Oreo‟s low brand maturity in India, promotional efforts should emphasize Oreo‟s specific
product attributes rather than appealing to emotional or nostalgic ties to the brand. To do this, Kraft
should create a campaign that emphasizes the sweet, delicious taste of Oreo and presents it as a
convenient, regular snack. The campaign could feature young, professional people eating Oreos to give
them a boost throughout the day.
Media campaigns should be transmitted through various outlets such as television, print, social
media, and billboards. However, any media advertising should be accompanied by large giveaways of
Oreo samples to induce trial. This tactic proved enormously successful in habituating the Brazilian
market to Tang, as well as the Chinese market to Oreo (in China, Oreo samples were handed out to more
than 300,000 consumers).
In China, senior management also encouraged local managers to develop promotional strategies,
saying "the more opportunity our local managers have to deal with local conditions will be a source of
competitive advantage for us.”5 For example, company-trained brand ambassadors rode around Beijing
on bicycles whose wheels were decorated with the Oreo image in order to increase brand awareness.
Kraft should use the same logic in India and support localized promotional efforts.
5
Jargon, Julie. “Kraft Reformulates Oreo, Scores in China.” Wall Street Journal. 1 May 2005.
7
8. PRICING
Kraft should offer smaller Oreo packages with lower price points for entry, as it did in China.
Oreo has been considered a premium snack product in India. Because most Indian consumers have less
disposable income to spend on snacks, small low-priced packages are the way to give consumers the
opportunity to purchase while still maintaining profit margins.
COMPETITOR ANALYSIS
The two major competitors in the Indian biscuit market are local companies Parle and Britannia.
Parle has nearly a 40% market share in the Indian biscuits segment and Britannia has 38%. Kraft‟s
international competitors are also moving into India. In the last year, the British company United Biscuits
entered the Indian market and PepsiCo launched a savory biscuit specifically for the Indian consumer.
KRAFT IN INDIA: FUTURE MARKETING STRATEGIES
NEW PRODUCTS
Given the demands of Indian consumers, Kraft should consider new product development that
reflects local tastes and uses distinctive local ingredients. For example, Kraft‟s competitor PepsiCo has
found success in tailoring products to local tastes. Its Frito Lay division launched a product called
Kurkure to bridge the gap between its core product, potato chips, and a traditional Indian food called
„namkeens‟. This product was designed specifically for Indian consumers‟ tastes and is now one of the
most popular food products in India.
INNOVATION
Market research indicates that Indian consumers respond positively to product innovation. For
example, Perfetti Van Melle (PVM) holds 25% of the confectionary market in India, and attributes its
success to product innovation, which has allowed them to charge a price premium of 100% over
competition6.
6
“Sweet Surrender: Can Kraft's Cadbury Acquisition Help It Tap the Indian Market?” Indian
Knowledge@Wharton. Wharton School of the University of Pennsylvania. 25 February 2010. Web.
8
9. Kraft should embrace the Indian market‟s responsiveness to innovation, and consider employing
novel strategies for product development, sales, distribution, and marketing.
ACCOUNTING
INCOME STATEMENT ANALYSIS (SEE APPENDICES L-N)
Between 2009 and the second quarter of 2010, Kraft‟s interest expense rose from $1.26 billion to
$1.58 billion, reflecting the increase in corporate debt from the Cadbury acquisition (from 18 billion in
2009 to 29 billion as of September 2010).
Kraft declared dividends of $1.16 in 2009, reflecting a smooth rise from $1.12 in 2008 and from
$1.04 in 2007. Its dividend payout in 2009 was 56.7% of net income, in line with its 5-year average.
KRAFT 5-yr Average 2009 2008 2007 2006 2005
Dividend Payout 62.1% 56.7% 89.9% 63.2% 51.0% 49.5%
Plowback 37.9% 43.3% 10.1% 36.8% 49.0% 50.5%
Kraft‟s interest coverage ratio rose slightly to 4.3x in 2009, which is still well below its five-year
average of 6.8x debt, meaning the company is comfortably able to handle its debt service payments.
KRAFT 5-yr Average 2009 2008 2007 2006 2005
Operating Margin 13.8% 13.5% 11.9% 13.1% 15.3% 15.3%
Interest Coverage 6.8x 4.3x 4.0x 7.8x 9.9x 8.0x
BALANCE SHEET ANALYSIS (SEE APPENDICES O-U)
Kraft‟s long-term debt more than doubled from $8.475 billion 2005 to $18.024 billion in 2009, as
a result of activities such as the acquisition of LU Biscuits in 2007 for $7.6 billion. The Cadbury
acquisition further increased debt levels by over $10 billion, bringing long-term debt to $29.571 billion in
2010. Kraft restructured two-thirds ($20 billion) of its debt in 2009, pushing it 30 years into the future.
Its current weighted average term of long-term debt is 20 years (66% restructured to 30 years and 33%
restructured to three years). As a result of restructuring, Kraft is now able to match long-term sources of
funds with long-term uses of funds. However, debt only partly funded the purchase. Kraft also divested
its profitable North American frozen pizza business to Nestle for $3.7 billion in 2010, a transaction which
9
10. also decreased balance sheet accounts such as gross PP&E, Inventory, and Other Intangibles.
Accordingly, Kraft‟s Total Debt/ Capital ratio dropped 5% in 2009.
KRAFT 5-yr Average 2009 2008 2007 2006 2005
Total Debt/Total Capital 37.7% 42.3% 47.7% 43.5% 27.5% 27.5%
Kraft reported 1.75 billion shares of common stock in 2010 versus 1.48 billion shares in 2009.
This increase includes an issuance of 262 million additional shares of common stock, at a total fair value
of $7.457 billion, as part of the Cadbury acquisition.
Retained earnings rose to $14.636 billion in 2009, a rise of over $1 billion from $13.345 billion
retained earnings in 2008. Kraft‟s 2009 plowback ratio of 43.4% was a marked rise from 2008.
KRAFT 5-yr Average 2009 2008 2007 2006 2005
Plowback 37.9% 43.3% 10.1% 36.8% 49.0% 50.5%
Inventory increased with the Cadbury acquisition from $2.775 billion in 2009 to $5.735 billion in
September 2010. Accounts payable also increased from $3.766 billion in 2009 to $5.13 billion in the
second quarter of 2010, for the same reason. The acquisition had a marked influence on „days to
inventory‟ and „days to payable‟, increasing the former from 53 to 69 and the latter from 53 to 62. This
change could be attributed to a different pace of business overseas. Accounts receivable was less
dramatically affected by Cadbury, and has steadily increased over time from $4.704 billion in 2008, to
$5.197 billion in 2009, and to $6.013 billion in 2010.
It is important to note that Kraft changed its inventory valuation method from „LIFO‟ to „Average
Cost‟ in 2009. The use of average cost method is an industry trend among food manufacturers, including
many of Kraft‟s competitors. Future ease of comparison to competitors‟ financial statements is one
benefit of this switch. This change, however, does not materially impact stated financial projections.
VALUATION
DISCOUNTED CASH FLOW (DCF) ANALYSIS (SEE APPENDICES V-AA)
10
11. Kraft is valued using a discounted cash flow analysis, the results of which are validated by
applying market-based price multiples. The DCF analysis is based primarily on earnings forecasts and
employs modest terminal growth rates. Calculations indicate Kraft‟s fair value price to be $43.33; but it
currently trades at a stock price of $31. At this price, the company is trading at an approximate 28.5%
discount to its fair value. The drivers behind this valuation are listed below:
REVENUE: Revenue is predicted to grow 5% annually from 2010-2012, based on company
estimates. Kraft has proactively responded to higher commodity prices by leveraging the power
of its brands and raising prices. It will be important to monitor Kraft‟s price spreads relative to its
competitors‟ to ensure that pricing does not impair future growth opportunities. In addition to
increasing prices, Kraft is expected to increase its revenues by leveraging the distribution
opportunities presented by the Cadbury acquisition.
COST OF GOODS SOLD (COGS): As a percentage of sales, COGS is projected to drop slightly
going forward. Inputs costs have jumped sharply in recent years and Kraft has increased its price
levels to better align with these costs by leveraging its strong brand portfolio. Going forward,
COGS as a percentage of sales is predicted to be approximately 62%, which represents the
average of Kraft‟s COGS as a percentage of sales from 2007 to 2009, rather than the recent high.
As per Kraft‟s third quarter 2010 earnings call, gross margin pressure is expected to ease as price
levels better align with input costs. 7
SELLING, GENERAL & ADMINISTRATIVE (SG&A): SG&A expenses are projected to remain at
23% of sales over the next 5 years. This figure is approximately 1% and 2% above the 2008 and
2009 percentage rates, respectively; and it assumes advertising expenses will increase in efforts to
develop new markets. The rise in advertising costs will be partially offset by cost savings
7
Rosenfeld, Irene. "Kraft Foods CEO Discusses Q3 2010 Results." Seeking Alpha. 4 November 2010. Web.
11
12. resulting from Cadbury and LU integrations, as well as procurement, manufacturing and logistics.
Kraft recently affirmed that the anticipated cost savings from Cadbury and LU were on track.8
EBIT MARGIN: Kraft‟s operating margins are expected to rise to nearly 15% in the coming years,
as the company drives COGS down and makes a concentrated effort to expand margins in
Europe. This is a 1% increase over 2009 levels.
MARKET-BASED PRICE MULTIPLES: As evidenced by the P/E ratio, sales, EBIT and EBITDA
multiples below, Kraft is currently trading at a discount to its peers. This discount comports with
the 28% discount to fair value projected using the DCF model.
Enterprise Price / EPS Enterprise Value /
Company Value LTM NTM Sales EBIT EBITDA
Kraft 82,051.4 12.07 13.45 1.8x 14.3x 12.1x
Mean 112,897.7 18.65 15.50 3.5x 15.0x 12.4x
Kraft Discount to Mkt (54.5%) (15.2%) (94%) (4.9%) (2.5%)
Nestle 224,788.2 17.81 15.88 4.1x 15.7x 12.7x
Pepsi 121,159.3 16.32 14.09 2.3x 14.1x 11.3x
Coco-Cola 149,938.8 19.81 16.84 4.7x 16.0x 14.1x
Danone 48,957.5 22.01 15.58 4.5x 16.9x 13.4x
Heinz 19,644.9 17.27 15.14 1.9x 12.3x 10.4x
Source: Fact Set, as of 12/9/10
CONCLUSION
Kraft, in 2010, is well on its way to becoming “a global snacks powerhouse” that takes full
advantage of its “unrivaled portfolio of brands people love.” With newly acquired distribution channels
that allow it to permeate international markets, Kraft can leverage its scale and brand equity to grow into
the future. To accomplish this global strategy successfully and sustainably, Kraft should localize
marketing efforts as well as create and utilize best practices in tailoring its products and promotions to
developing markets. Though it is in a strong financial position, the company must continue to manage its
long-term debt through smart restructuring and avoid investing activities that would increase its existent
debt. In doing all of this, Kraft will fully realize the potential of its investment in Cadbury.
8
Rosenfeld, Irene. "Kraft Foods CEO Discusses Q3 2010 Results." Seeking Alpha. 4 November 2010. Web.
12
13. APPENDICES
APPENDIX A – NET REVENUE BY OPERATING SEGMENT (2006, 2010)
KRAFT NET REVENUE
2006
Developing
Markets
13%
North America Europe
67% 20%
KRAFT NET REVENUE
2010
Developing
Markets
26%
North America
49%
Europe
25%
13
14. APPENDIX B - HISTORY OF MERGERS, ACQUISITIONS & NAME CHANGES
Year Kraft National Dairy Products General Foods
Corporation
1928 Acquired Phenix Cheese
Company, maker of
Philadelphia brand cream
cheese. Changed name
to “Kraft-Phenix Cheese
Company”.
1930 Acquired Kraft-Phenix
Cheese Company
1969 Name changed to Kraftco Corporation.
1976 Name changed to Kraft, Inc.
1981 Acquired Oscar Mayer &
Co.
1985 Phillip Morris Companies
acquires General Foods
1986 Kraft, Inc. purchases Tombstone Pizza Corporation
1988 Phillip Morris acquires Kraft, Inc. for $12.9 billion
1989 Philip Morris combined Kraft, Inc. and General Foods Corporation to form Kraft
General Foods, the largest food company in the U.S.
1993 Nabisco ready-to-eat cold cereals acquired from RJR Nabisco.
1995 Kraft General Foods renamed Kraft Foods, Inc.
2000 Philip Morris acquires Nabisco Holdings for $18.9 billion.
2001 Philip Morris sells a 16.1 percent stake in Kraft Foods, Inc. to the public.
2007 Kraft Foods, Inc. acquires United Biscuit‟s operations in Spain and Portugal
2007 Kraft Foods, Inc. acquires LU Biscuit from Groupe Danone for $7.2 Billion
2010 Kraft Foods, Inc. acquires Cadbury for $19.5 Billion
APPENDIX C - NET REVENUE BY CONSUMER SECTOR (2006, 2010)
KRAFT NET REVENUE
2006
Confectionary Grocery
9% 14%
Convenient
Snacks Meals
26% 15%
Cheese
Beverages 17%
19%
14
15. APPENDIX C (CONTINUED) - NET REVENUE BY CONSUMER SECTOR (2006, 2010)
KRAFT NET REVENUE
2010
Grocery
8%
Confectionery Convenient
29% Meals
10%
Cheese
14%
Snacks
22% Beverages
17%
APPENDIX D - 11 $1 BILLION KRAFT BRANDS
15
17. APPENDIX F – KEY COMPETITOR ANALYSIS
KRAFT: KEY COMPETITOR ANALYSIS
Note: Kraft faces many competitors given its wide array of product categories. For the purposes of this
analysis, competitors were chosen that also have an international presence and compete with Kraft in one
or more product categories. Particular focus is given to presence in India.
COCA COLA COMPANY:
Coca Cola is a major international beverage company. It owns or licenses over 500 nonalcoholic
beverages and is the world‟s largest juice and juice drink company. Its brands include Coca Cola,
Fruitopia, Dasani, and Powerade. It has an extensive worldwide network of bottlers and distributors and is
present in over 200 countries. Coca Cola is making a push into developing countries over the next 10
years; specifically it lists Mumbai, India as one of its top “Cities Key to Our Growth” as the GDP there is
expected to see growth of $141 billion through 2020.
DANONE:
The France based Danone is a provider of healthy food products. Its products include dairy, water, and
baby nutrition and it is number one in the world for fresh dairy. Its brands include Actimel, Activia, and
Evian. Danone has a goal to double its geographic reach and it is currently established in over 40
developing countries. It recently left the global biscuit business (sold to Kraft in 2007). Danone is having
a lot of success with milk products in India, even following its recent split from Indian based Britannia.
HEINZ:
Heinz is the most global of all U.S. based food companies, with products in over 200 countries. It
provides foods with an emphasis on health and wellness, including ketchup, sauces, snacks, and infant
nutrition. Heinz entered the Indian market in 1994 with its takeover of the Family Product Division of
Glaxo. It currently has an array of strong, recognizable brands in India, including Complan Milk Biscuits.
NESTLE:
Nestle has a wide range of products, including confectionary, dairy, cereals, coffee, and nonalcoholic
beverages. It is the world‟s largest food company and has a focus on nutrition, health and wellness. Nestle
already has a strong presence in India as it offers a wide range of products and is a well respected brand.
It recently announced it will be increasing its investments in India. It also just opened a large
manufacturing plant in Dubai, confirming its commitment to the Middle East.
PEPSICO:
PepsiCo has a range of products including beverages, snacks, and cereals. Its brands include Pepsi-Cola,
Frito-Lay, Tropicana, Quaker, and Gatorade. It has a large international presence and its products are
available in over 150 countries. PepsiCo is currently focusing on expanding its distribution network and
recently agreed to acquire 66% of Russia‟s Wimm-Bill-Dann Dairy & Juice Company which will make
Pepsi the largest food and beverage business in Russia. PepsiCo is performing well in its Asia, Middle
East, and Africa segment and notes exceptional growth in its India beverage business.
17
18. APPENDIX G - HISTORY OF NEW PRODUCT INTRODUCTION (DOMESTIC)
Year New Product
1765 Baker‟s chocolate brand introduced in Dorchester, MA
1880 Philadelphia Brand Cream Cheese introduced to market by the Empire Cheese
Company of New York
1892 Maxwell House coffee blend developed in Nashville, TN
1895 C.W. Post created Grape-Nuts cereal in Battle Creek, Michigan
1899 Trademark rights to Jell-O brand gelatin purchased
1903 National Biscuit Company (N.B.C.) launches the Oreo brand cookie.
1914 J.L. Kraft & Bros. Co. began producing process cheese in tins, which was shipped to
armed forces during World War I
1927 Kool-Aid powdered fruit drink created
1928 J.L. Kraft & Bros. Co. introduces Velveeta brand process cheese
1933 J.L. Kraft & Bros. Co. introduces Miracle Whip brand salad dressing at Chicago‟s
World‟s Fair
1934 Ritz crackers are launched by N.B.C.
1937 Kraft macaroni and cheese dinner introduces
1949 Minute brand rice distributed nationally
1950 Kraft deluxe process cheese slices introduced to the U.S. market
1952 Cheez Whiz pasteurized process cheese spread introduced.
1954 Cracker Barrel brand natural cheese introduced.
1957 Tang breakfast beverage crystals introduced by General Foods Corporation.
1965 Shake „N Bake coating mix introduced by General Foods Corporation
1966 Cool Whip nondairy topping introduced
1972 Stove Top stuffing mix introduced
1973 General Foods International Coffees flavored coffees introduced by General Foods
Corporation
1988 Lunchables brand meat and cheese snacks introduced by Oscar Mayer
1989 Di Giorno brand refrigerated pastas and sauces introduced
1998 Easy Mac microwavable macaroni and cheese dinner introduced
2004 100 Calorie Packs introduced
2010 Oscar Mayer Carving Board sliced deli meats introduced
18
19. APPENDIX H - SWOT ANALYSIS: KRAFT FOODS, INC.
Strengths Weaknesses
Portfolio of iconic brands Long-term strategy is undifferentiated from
Fully penetrated domestic competitors‟
distribution Low number of distinctly differentiated products /
Well-positioned after recent high opportunity for customer switching
price wars Dependence on a few large retailers for distribution
Pricing power due to Declining sales volume in U.S., particularly of
important brands cheese
Passive response to health trends and development
of healthy products/brands
Slow movement into new communications
platforms, particularly social media
High debt levels
Opportunities Threats
Growth in emerging markets Rise in demand for natural & organic foods hurts
Consolidated focus on snacks, the processed food manufacturers
confectionary and quick Increasing raw material prices hurt earnings
meals allows Kraft to shed Economic situation driving prices down
peripheral holdings Strained relationship with Starbucks could result in
Expanding margins in Europe loss of profitable operating segment
Fluctuation of foreign exchange rates affects
company performance
Proliferation of generic/store brands
Change in regulations for tax treatment of
dividends
APPENDIX I - SWOT ANALYSIS: CADBURY ACQUISITION
Strengths Weaknesses
Access to established distribution networks Forced divestiture of profitable frozen
in developing markets pizza division
Competitive victory over Hershey – clear Hostile negotiation process
demonstration of muscle Negative press coverage of British
Greater confectionary synergies opposition and Warren Buffet‟s
Combined increased gum/chocolate market disapproval
share Companies historically pursued
different positioning
Opportunities Threats
Inroads into Africa and South Asia through Focus on international operations
Cadbury subsidiaries could weaken domestic business
Leveraging Cadbury brand equity in Integration difficulties
developing markets Possible “brain drain” from Cadbury
19
20. APPENDIX J - SWOT ANALYSIS: OREO IN INDIA
Strengths Weaknesses
Distribution benefits from Cadbury‟s Inherent disorganization of
supply chain network distribution channels
Product well-aligned to Indian consumers‟ Low maturity brand / low brand
penchants for sweets and increasingly awareness
frequent snacking habits Potential for a slow start
Vegetarian Potential taste disparities/need to
Appropriate to climate (non-melting, long alter recipe, flavor
shelf life) Pricing problems, low margins
Proven success in Chinese market Lack of existing Kraft brand foothold
in snacks
Opportunities Threats
Growing demand for snack foods Backlash of Indian market to
Creation of market for Kraft snacks American corporations and packaged
Line extensions goods
Establish method for introducing future Quality control in manufacturing
products Low association between Oreo and
Get a grassroots knowledge of Indian Kraft means Kraft cannot leverage
consumer market the biscuit‟s success
Potential alliances with local biscuit Losing in-store to competitors
manufacturers
APPENDIX K – EXAMPLE: OREO IN CHINA
20
21. APPENDIX L – INCOME STATEMENT: FORECASTING VARIABLES
INCOME STATEMENT FORECAST TABLE
REVENUE FORECAST Expected Sales Growth for years 2011 - 2012
Annual Sales Growth Country % KFT sales Weighted Growth
10% Develop. Mkts 26% 2.6%
2-3% Euro 25% 0.6%
3-4% US 49% 1.7%
Total 5.0%
2008 2009 Sep 10 real - Dic (F) 2011 2012 2013 2014 2015
Sales Growth 17% -4% 18% 5.0% 5.0% 5.0% 3.0% 3.0%
COGS as % of Sale 67% 64% 63% 62.5% 62.0% 62.0% 62.0% 62.0%
SGA 21% 22% 23% 23% 23% 23% 23% 23%
Net PP&E 9,917.0 10,693.0 13,710.0
Depreciation & Amort. 937.0 905.0 1,134.0
Depreciation/PPE 9.4% 8.5% 8.27% 8.27% 8.27% 8.27% 8.27% 8.27%
Interest Expense Calculation
* As per the amortization Table (sum of the 12 months corresponded for each period)
Income Tax Calculation 2,603 4,287 4,162
Income Tax Expense 755 1,259 1,344
Income Tax (%) 29% 29.4% 32% 29% 29% 29% 29% 29%
APPENDIX M – INCOME STATEMENT (2008-2010 REAL, 2011- 2015 FORECASTED)
INCOME STATEMENT
Restated
For the Fiscal Period Ending 12 mos. 12 months
12/31/08 12/31/09 Sep 10 real - Dic (F) 12/31/11 12/31/1212/31/13 12/31/14 12/31/15
Currency USD USD USD USD USD USD USD USD
Revenue 41,932 40,386 47,663 50,046 52,548 55,176 56,831 58,536
Other Revenue - - - 0 0 0 0 0
Total Revenue 41,932 40,386 47,663 50,046 52,548 55,176 56,831 58,536
Cost Of Goods Sold 28,050 25,786 29,949 31,279 32,580 34,209 35,235 36,292
Gross Profit 13,882 14,600 17,714 18,767 19,968 20,967 21,596 22,244
Selling General & Admin Exp. 8,712 9,002 10,946 11,511 12,086 12,690 13,071 13,463
Amort. of Goodwill and Intangibles 23 26 157 0 0 0 0 0
Depretiation Expense 179 182 186 190 193
Other Operating Exp., Total 8,735 9,028 11,103 11,689 12,268 12,876 13,261 13,657
Operating Income 5,147 5,572 6,611 7,078 7,700 8,090 8,335 8,587
Interest Expense -1,272 -1,260 -1,579 -1,825 -1,775 -1,722 -1,666 -1,606
EBT 2,603 4,287 4,162 5,253 5,925 6,368 6,669 6,981
Income Tax Expense 755 1,259 1,344 1,543 1,740 1,870 1,959 2,050
Minority Int. in Earnings -9 -7 -19
Earnings from Cont. Ops. 1,839 3,021 2,799 3,710 4,185 4,498 4,711 4,931
Earnings of Discontinued Ops. 1,045 - 1,485
Extraord. Item & Account. Change - - -
Net Income 2,884 3,021 4,284 3,710 4,185 4,498 4,711 4,931
21
22. APPENDIX N – KRAFT OPERATING PROFITS BY SEGMENT
BUSINESS SEGMENTS
Restated Restated 12
For the Fiscal Period Ending 12 months 12 months months
12/31/07 12/31/08 12/31/09
Currency USD USD USD
Revenues
Kraft Foods North America - U.S. Beverages US 2,990.0 3,001.0 3,057.0
Kraft Foods North America - U.S. Cheese US 3,745.0 4,007.0 3,605.0
Kraft Foods North America - U.S. Convenient Meals US 3,905.0 4,240.0 4,496.0
Kraft Foods North America - U.S. Grocery US 3,277.0 3,389.0 3,453.0
Kraft Foods North America - U.S. Snacks US 4,879.0 5,025.0 4,964.0
Kraft Foods North America - Canada & N.A. Foodservice US 4,080.0 4,294.0 4,087.0
North America - Beverages US - - -
North America - Cheese & Food Service US - - -
North America - Convenient Meals US - - -
North America - Grocery US - - -
North America - Snacks & Cereals US - - -
Total US 22,876.0 23,956.0 23,662.0
Kraft Foods Europe Europe 7,007.0 9,728.0 8,768.0
Kraft Foods Developing Markets Developing Mkts. 5,975.0 8,248.0 7,956.0
Total Revenues 35,858.0 41,932.0 40,386.0
Operating Profit Before Tax
Kraft Foods North America - U.S. Beverages 346.0 381.0 511.0
Kraft Foods North America - U.S. Cheese 487.0 563.0 667.0
Kraft Foods North America - U.S. Convenient Meals 319.0 339.0 510.0
Kraft Foods North America - U.S. Grocery 1,022.0 1,009.0 1,146.0
Kraft Foods North America - U.S. Snacks 716.0 638.0 723.0
Kraft Foods North America - Canada & N.A. Foodservice 443.0 448.0 527.0
Kraft Foods Europe 455.0 182.0 785.0
Kraft Foods Developing Markets 588.0 815.0 936.0
Corporate - - -
North America - Beverages - - -
North America - Cheese & Food Service - - -
North America - Convenient Meals - - -
North America - Grocery - - -
North America - Snacks & Cereals - - -
Total Operating Profit Before Tax 4,376.0 4,375.0 5,805.0
22
23. EXHIBIT O – BALANCE SHEET: FORECASTING VARIABLES
BALANCE SHEET FORECAST TABLE
Balance Sheet Historic Data 2008 2009 2010 Forecast 2011 - 2115
Accounts Receivable 4,704 5,197 6,013
Receivables Turnover 8.9 7.8 7.9 8.0
Days To Receivables 40 46 45 45
Inventory 3,881 3,775 5,735
Inventory Turnover 7 7 5 5.2
Days to Inventory 50 53 69 69
Accounts Payable 3,373 3,766 5,130
Payables Turnover 8.3 6.8 5.8 5.8
Days to Payables 43 53 62 62
Accrued Expenses 2,754.0 3,356.0 3,144.0
Accrued Expenses as % to COGS 10% 13% 10% 11%
Calcualtion Of Payment for LTD
Long Term Debt
Term
Interest Rate
Payment
PPE 17,815.0 19,423.0 22,644.0
PPE Growth -7.2% 9.0% 16.6% 2.0%
Depretiation Expense 0.44 0.45 39% 39%
Other Variables Growth
Short Term Investment Growth
Deferred Tax Assets, Curr. These accounts have the same forecasted annual growth as Revenues
Other Current Assets
Accrued Exp.
Other Current Liabilities These accounts have the same forecasted annual growth as COGS
Pension & Other Post-Retire. Benefits
Def. Tax Liability, Non-Curr.
Dividend Payout Calculations 2011 2012 2013 2014 2015
Net Income 3,710 4,185 4,498 4,711 4,931
Outstanding Shares 1,747 1,747 1,747 1,747 1,747
EPS 2.12 2.40 2.58 2.70 2.82
Dividend Payout % per share 60% 60% 60% 60% 60%
Dividen Paid per share 1.274 1.437 1.545 1.618 1.694
Total Amount of Dividend Paid (Div. per share x Outstand. shares) 2,226 2,511 2,699 2,826 2,959
23
25. APPENDIX Q – COMPOSITION OF DEBT
COMPOSITION OF DEBT
(in millions)
Debt Summary Data 2007 2008 2009
Total Senior Bonds and Notes 19,094 91% 19,282 95% 18,467 97%
Total Commercial Paper 1,608 8% 606 3% 262 1%
Other Debt 307 1% 363 2% 262 1%
Total 21,009 20,251 18,991
$25,000
$20,000
$ (in millions)
$15,000
Other Debt
$10,000 Total Commercial Paper
Total Senior Bonds and Notes
$5,000
$0
2007 2008 2009
YEAR
25
26. APPENDIX R – HISTORICAL CAPITALIZATION
HISTORIC CAPITALIZATION
USD USD USD USD USD USD
In Millions of Dollars Aug-05-2009 Nov-03-2009 Feb-25-2010 May-07-2010 Aug-06-2010 Nov-05-2010
Total Debt 20,225.0 20,725.0 18,990.0 31,036.0 30,159.0 30,362.0
Minority Interest 84.0 86.0 96.0 316.0 60.0 102.0
Market Cap 41,785.8 40,644.5 42,620.7 52,426.5 52,949.6 54,289.7
Components of Total Enterprise Value
90,000.0
80,000.0
70,000.0
60,000.0
50,000.0 Market Cap
40,000.0 Minority Interest
30,000.0 Total Debt
20,000.0
10,000.0
0
Year 2010
Total Debt 30,362.0
Minority Interest 102.0
Market Cap 54,289.7
Components of Total Year 2010
Enterprise Value
Total Debt 30,362.0
Minority Interest 102.0
Total Debt Minority Interest Market Cap
Market Cap 54,289.7
Components of Total
36% Enterprise Value
NOTE: As reflected in the table to the left, almost
64% two thirds of the capital structure is debt and one
third derives fromMinority Interest Market Cap
Total Debt
equity.
0%
36%
64%
0%
26
27. APPENDIX S – LONG TERM AMORTIZATION TABLE
LONG-TERM AMORTIZATION TABLE
Inputs
Loan Amount $ 30,035
Annual Interest Rate 6.15%
Term of Loan in Years 20
First Payment Date 1/1/2011
Frequency of Payment Monthly
Summary
Rate (per period) 0.513%
Payment (per period) $217.79
Total Payments $52,268.24
Total Interest $22,233.24
Interest Savings $0.70
Payment Additional
No. Due Date Due Payment Interest Principal Balance
$30,035
1 1/1/2011 217.79 0.00 153.93 63.86 29,971.14
2 2/1/2011 217.79 0.00 153.60 64.19 29,906.95
3 3/1/2011 217.79 0.00 153.27 64.52 29,842.43
4 4/1/2011 217.79 0.00 152.94 64.85 29,777.58
5 5/1/2011 217.79 0.00 152.61 65.18 29,712.40
6 6/1/2011 217.79 0.00 152.28 65.51 29,646.89
7 7/1/2011 217.79 0.00 151.94 65.85 29,581.04
8 8/1/2011 217.79 0.00 151.60 66.19 29,514.85
9 9/1/2011 217.79 0.00 151.26 66.53 29,448.32
10 10/1/2011 217.79 0.00 150.92 66.87 29,381.45
11 11/1/2011 217.79 0.00 150.58 67.21 29,314.24
12 12/1/2011 217.79 0.00 150.24 67.55 29,246.69
NOTE: The charts above display the first year of the long-term amortization of Kraft‟s debt. The values
regarding the long-term balance of debt as well as the annual interest expense are directly linked to this
table, which has a 10 years term.
27
28. APPENDIX T – CAPITAL STRUCTURE DETAILS (2008, 2009)
FY 2009 Capital Structure As Reported Details
Principal Due Repayment
Description Type (USD) Coupon Rate Maturity Seniority Secured Convertible Currency
7% Debenture Bonds and Notes - 7.000% Nov-01-2011 Senior No No USD
Capital Leases Capital Lease 66.0 NA - Senior Yes No USD
Commercial Paper Commercial Paper 262.0 0.500% Dec-31-2010 Senior No No USD
Euro Notes Bonds and Notes 4,072.0 5.750% - 6.250% 2015 Senior No No EUR
Notes Bonds and Notes 9,045.0 0.770% - 7.552% 2039 Senior No No USD
Other Borrowings Other Borrowings 5.0 NA - Senior No No NA
Senior Unsecured Notes Bonds and Notes 500.0 6.750% Feb-19-2014 Senior No No USD
Senior Unsecured Notes Bonds and Notes 750.0 6.875% Jan-26-2039 Senior No No USD
Senior Unsecured Notes Bonds and Notes 1,250.0 6.125% Aug-23-2018 Senior No No USD
Senior Unsecured Notes Bonds and Notes 2,000.0 5.750% Mar-20-2012 Senior No No USD
Senior Unsecured Notes Bonds and Notes 850.0 6.250% Mar-20-2015 Senior No No USD
Uncommitted Credit Lines Revolving Credit 191.0 5.900% Dec-31-2010 Senior No No USD
FY 2008 Capital Structure As Reported Details
Principal Due Repayment
Description Type (USD) Coupon Rate Maturity Seniority Secured Convertible Currency
7% Debenture Bonds and Notes 182.0 7.000% Nov-01-2011 Senior No No USD
Capital Leases Capital Lease 61.0 NA - Senior Yes No USD
Commercial Paper Commercial Paper 606.0 0.500% Dec-31-2010 Senior No No USD
Euro Notes Bonds and Notes 3,970.0 5.750% - 6.250% 2015 Senior No No EUR
Notes Bonds and Notes 9,780.0 0.770% - 7.552% 2039 Senior No No USD
Other Borrowings Other Borrowings 11.0 NA - Senior No No NA
Senior Unsecured Notes Bonds and Notes 1,250.0 6.125% Aug-23-2018 Senior No No USD
Senior Unsecured Notes Bonds and Notes 750.0 6.875% Jan-26-2039 Senior No No USD
Senior Unsecured Notes Bonds and Notes 500.0 6.750% Feb-19-2014 Senior No No USD
Senior Unsecured Notes Bonds and Notes 850.0 6.250% Mar-20-2015 Senior No No USD
Senior Unsecured Notes Bonds and Notes 2,000.0 5.750% Mar-20-2012 Senior No No USD
Uncommitted Credit Lines Revolving Credit 291.0 13.000% Dec-31-2009 Senior No No USD
for Working capital Needs
28
29. APPENDIX U – HISTORICAL CASH FLOW
Cash Flow
For the Fiscal Period Ending 2005 2006 2007 2008 2009
Currency USD USD USD USD USD
Net Income 2,632.0 3,060.0 2,721.0 2,884.0 3,021.0
Depreciation & Amort. 867.0 819.0 829.0 937.0 905.0
Amort. of Goodwill and Intangibles 10.0 7.0 13.0 23.0 26.0
Depreciation & Amort., Total 877.0 826.0 842.0 960.0 931.0
(Gain) Loss From Sale Of Assets (108.0) (368.0) (14.0) 92.0 6.0
Asset Writedown & Restructuring Costs 315.0 793.0 209.0 731.0 17.0
Stock-Based Compensation - 142.0 136.0 178.0 164.0
Net Cash From Discontinued Ops. 34.0 65.0 44.0 (900.0) -
Other Operating Activities (408.0) (168.0) (271.0) (112.0) 314.0
Change in Acc. Receivable 65.0 (200.0) (268.0) (39.0) (17.0)
Change In Inventories (42.0) (149.0) (404.0) (151.0) 299.0
Change in Acc. Payable 74.0 256.0 241.0 29.0 126.0
Change in Inc. Taxes (33.0) - - - -
Change in Other Net Operating Assets 58.0 (537.0) 335.0 469.0 223.0
Cash from Ops. 3,464.0 3,720.0 3,571.0 4,141.0 5,084.0
Capital Expenditure (1,171.0) (1,169.0) (1,241.0) (1,367.0) (1,330.0)
Cash Acquisitions - - (7,437.0) (99.0) -
Divestitures 1,668.0 946.0 216.0 97.0 41.0
Invest. in Marketable & Equity Securt. - - - - -
Net (Inc.) Dec. in Loans Originated/Sold - - - - -
Other Investing Activities 28.0 107.0 46.0 49.0 50.0
Cash from Investing 525.0 (116.0) (8,416.0) (1,320.0) (1,239.0)
Total Debt Issued 176.0 474.0 12,144.0 7,018.0 3.0
Total Debt Repaid (1,780.0) (1,324.0) (1,621.0) (6,707.0) (1,414.0)
Repurchase of Common Stock (1,175.0) (1,254.0) (3,708.0) (777.0) -
Common Dividends Paid (1,437.0) (1,562.0) (1,638.0) (1,663.0) (1,712.0)
Total Dividends Paid (1,437.0) (1,562.0) (1,638.0) (1,663.0) (1,712.0)
Special Dividend Paid - - - - -
Other Financing Activities 265.0 (54.0) (56.0) 72.0 (10.0)
Cash from Financing (3,951.0) (3,720.0) 5,121.0 (2,057.0) (3,133.0)
Foreign Exchange Rate Adj. (4.0) 39.0 52.0 (87.0) 145.0
Net Change in Cash 34.0 (77.0) 328.0 677.0 857.0
29
30. APPENDIX V – DISCOUNTED CASH FLOW MODEL - KRAFT
DISCOUNTED CASH FLOW MODEL - KRAFT
All figures in millions, except per share data
Operating scenario:
Last fiscal year end date: 12/31/10
Valuation / deal date: 01/01/11
Stub year fraction: 99.7%
Weighted average cost of capital: 6.2%
Free cash flow buildup
Projected Annual Forecast
1 2 3 4 5
2011 2012 2013 2014 2015
12/31/11 12/31/12 12/31/13 12/31/14 12/31/15
US 25,030.1 24,260.9 23,171.8 23,207.7 23,211.3
Europe 11,541.9 12,725.0 14,029.3 14,739.2 15,485.0
Emerging Markets 13,474.1 15,562.6 17,974.7 18,884.3 19,839.8
Total Revenues 50,046.2 52,548.5 55,175.9 56,831.2 58,536.1
EBITDA 7,256.7 7,882.3 8,276.4 8,524.7 8,780.4
EBIT 7,078.0 7,700.0 8,090.5 8,335.1 8,587.0
Tax rate 29.4% 29.4% 29.4% 29.4% 29.4%
EBIAT 4,999.4 5,438.7 5,714.5 5,887.2 6,065.2
Depreciation & Amortization 178.7 182.3 185.9 189.6 193.4
Account Receivable (242.8) (312.8) (328.4) (206.9) (213.1)
Inventories (260.1) (249.4) (312.2) (196.7) (202.6)
Account Payable 256.9 224.1 280.6 176.7 182.1
Accrued expenses 157.2 165.1 173.3 182.0 191.1
Changes in working capital (88.7) (173.0) (186.8) (44.9) (42.6)
Capital expenditures (452.9) (461.9) (471.2) (480.6) (490.2)
Unlevered free cash flows 4,636.4 4,986.0 5,242.4 5,551.4 5,725.8
Discount factor 0.942 0.887 0.835 0.786 0.741
Present value of free cash flows 4,366.1 4,421.4 4,377.8 4,365.4 4,240.0
Sum of present values of FCFs 21,770.7
Terminal value Equity value calculations
Growth in perpetuity method Enterprise value 104,246.4
Long term growth rate 1.0% Calculation of net debt:
Free cash flow (t+1) 5,783.0 Current portion of long-term debt 331.0
Terminal value 111,376.2 Short term debt 460.0
PV of Terminal Value 82,475.7 Long term debt 30,035.0
Sum of present values of FCFs 21,770.7 Convertible debt 0.0
Enterprise value 104,246.4 Minority interest 102.0
Exit multiple method Less: Excess cash (2,288.0)
Exit EV / EBITDA multiple 12.0x Less: Equity investments (84.0)
LTM EBITDA at end of projection 8,780.4 Net debt 28,556.0
Terminal value 105,365.0 Equity value 75,690.4
Present value of terminal value 78,024.3 Shares outstanding 1,746.8
Enterprise value 99,795.0 Equity value / share $43.33
30
31. APPENDIX V (CONTINUED) – DISCOUNTED CASH FLOW MODEL - KRAFT
PERCENTAGE OF NET REVENUES
Segment 2009 2011 2012 2013 2014 2015
US 50.01% 46.17% 42.00% 40.84% 39.65% 38.45%
Europe 23.06% 24.22% 25.43% 25.94% 26.45% 26.98%
Develop. 26.92% 29.62% 32.58% 33.23% 33.89% 34.57%
APPENDIX W – CAPITAL STRUCTURE
Cost of debt Capital structure
Cost of debt 6.15% Current capital structure
Marginal tax rate 29.4% Market value % Weight
Cost of debt after tax shield 4.3% Net debt 30,035.0 35.9%
Equity 53,521.0 64.1%
Cost of equity Total 83,556.0
Risk-Free Rate (rf) 4.25%
Market Risk 9.77%
Market Risk Premium (rm-rf) 5.5% Weighted average cost of capital
Raw (observed) beta 0.54 Weighted average cost of capital: 6.19%
Cost of Equity 7.23%
Summary DCF Output
Perpetuity Growth
$43.33 1.0% 1.5% 3.0% 4.0% 5.0%
6.2% $43.34 $48.63 $74.44 $111.28 $209.94
7.0% 35.18 38.97 56.02 76.86 118.54
Discount rates
8.0% 27.70 30.34 41.46 53.51 73.59 Equity value / share
9.0% 22.09 24.02 31.76 39.50 51.11
10.0% 17.73 19.19 24.83 30.16 37.63
NOTE: The table above represents forecasts of equity value (25 different outputs) per share, using as
variables for forecasting: Perpetuity Growth (x axis), Discount Rates (y axis).
31
36. APPENDIX BB - KRAFT DEBT SCHEDULE
KRAFT DEBT SCHEDULE (as of fiscal year end 2009)
Amount Reported Seniority
(USD mm) Cpn Rate Weighted Avg Cpn Type Maturity
500.0 6.750% 0.189% Fixed 2014 Senior Unsecured
2,000.0 5.625% 0.629% Fixed 2011 Senior Unsecured
800.0 5.250% 0.235% Fixed 2013 Senior Unsecured
750.0 6.000% 0.252% Fixed 2013 Senior Unsecured
1,000.0 6.875% 0.384% Fixed 2038 Senior Unsecured
750.0 6.875% 0.288% Fixed 2039 Senior Unsecured
1,500.0 6.250% 0.524% Fixed 2012 Senior Unsecured
250.0 5.625% 0.079% Fixed 2010 Senior Unsecured
1,500.0 6.500% 0.545% Fixed 2017 Senior Unsecured
1,250.0 6.125% 0.428% Fixed 2018 Senior Unsecured
750.0 6.500% 0.272% Fixed 2031 Senior Unsecured
750.0 7.000% 0.293% Fixed 2037 Senior Unsecured
2,000.0 6.125% 0.685% Fixed 2018 Senior Unsecured
1,220.0 6.250% 0.426% Fixed 2015 Senior Unsecured
2,870.0 5.750% 0.922% Fixed 2012 Senior Unsecured
17890.00
6.15% = KFT Weighted Avg Interest Rate on
Debt
APPENDIX CC – NOTES TO WACC CALCULATION
Risk-Free Rate
Risk-Free Rate: 4.25% This represents the 30-year U.S. Treasury per the Federal
Reserve Board Release H.15 Dec 7, 2010.
Market Risk Premium
Market Risk Premium: 5.52 (9.77-4.5%)
Expected Return of Market: 9.77%; we used the 30-yr history average return
on the MSCI World Index
RFR = 4.25% as stipulate above
36
37. APPENDIX DD - BETA CALCULATION: KRAFT
BETA CALCULATION
Beta: 0.54 Beta was calculated using weekly returns for Kraft for five years regressed against
the MSCI World Index. The MSCI World Index was selected due to the global nature of Kraft’s
business. Kraft’s levered beta is calculated to be 0.59. We derived Kraft’s unlevered beta using a
debt-to-equity ratio of 73.39% to eliminate differences in capital structure. Kraft’s unlevered beta
is calculated at 0.54, slightly below the average of its competitors, but in close proximity to the
group’s average.
Regression: KFT, Mkt (Levered β)
y = 0.5919x + 0.0003 0.15
R² = 0.3075
0.1
0.05
0
-0.25 -0.2 -0.15 -0.1 -0.05 0 0.05 0.1 0.15
-0.05
-0.1
-0.15
-0.2
APPENDIX EE – BETA CALCULATION: COMPARABLES
Company Equity (Mkt Cap) Debt D/E Tax Rate Levered Beta Unlevered Beta
Kraft $53,521.00 $30,035.00
56.12% 29.4% 0.59 0.54
Nestle $190,921.00 $34,791.00
18.22% 26.1% 0.52 0.59
Coke $148,935.00 $13,393.00 8.99% 25.0% 0.56 0.68
Pepsi $102,508.00 $24,201.00
23.61% 27.2% 0.48 0.54
Danone SA $30,530.00 $8,473.00
27.75% 21.0% 0.70 0.69
Heinz $15,713.00 $4,452.00
28.33% 27.8% 0.61 0.65
0.62
Unlevered Beta = Levered Beta/[(1+D/E)*(1-tax rate)]
NOTE: Selected comparables include manufacturers and marketers of food and beverage products
with an international customer base.
37
