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Kraft Foods Inc. ([url=http://www.zacks.com/stock/quote/kft]KFT[/url]) has teamed up with SodaStream International Ltd. (SODA - Snapshot Report) to make use of the SodaStream system for manufacturing and distributing some of Kraft's branded flavors.
SodaStream manufactures beverage carbonation systems, which enable consumers to easily transform ordinary tap water instantly into carbonated soft drinks and sparkling water. In addition, it sells its soda-making machines, flavors, carbon dioxide refills, and re-usable carbonation bottles around the world.
Under the deal, Kraft will produce, market, distribute and sell its branded flavors that will be used in a carbonated beverage. At a nascent stage, Kraft will chiefly provide the women's diet beverage Crystal Light and lemonade brand Country Time. In addition, the new carbonated drink will include the "All-Natural" lemonade.
Though the financial terms of the deal were not disclosed, both Kraft and SodaStream have agreed to launch their products during the second quarter of 2012.
Kraft will thus be able to make available its products to consumers who prefer to have their beverages carbonated. It will not only enhance the visibility of Kraft’s brand, but will also ensure consumer acceptance in U.S., as the demand for lemonade and iced tea is very strong.
However, some of the analysts have argued that though SodaStream is a nice product, it is also very expensive compared to Coca-Cola Company (KO - Analyst Report) and PepsiCo Inc. (PEP - Analyst Report). SodaStream requires one to spend on a machine along with the mixes and the CO2 bottles, making the product costlier compared to the prices of a 2-liter bottle of Coca-Cola or Pepsi.
Moreover, both Coca-Cola and Pepsi dominate the soda market, making it so it will be challenging for SodaStream and gain its market share.
Nevertheless, the deal is expected to boost the SodaStream business model. Moreover, this partnership may also is expected to open up the doors for other Kraft beverage brands to SodaStream, including Kool-Aid and Capri Sun, as the deal is a perfect combination of Kraft’s brands and SodaStream’s technology.
In other news, Kraft has recently named the CEOs and CFOs for the two companies that will be created after it splits into two entities.
Kraft had planned to spin off its North American grocery business to its shareholders and split itself into two independent public companies. It will split into a high-growth global snacks business with estimated revenue of $32 billion and a high-margin North American grocery business with estimated revenue of $16 billion.
Global snacks will henceforth consist of the current Kraft Foods Europe and Developing Markets units as well as the North American snacks and confectionery businesses. Kraft wanted to acquire Cadbury to provide scale for the snacks business, especially in emerging markets such as India. The North American grocery business would consist of the current U.S. Beverages, Cheese, Convenient Meals and Grocery segments and the non-snack categories in Canada and Food Service.
Further, Kraft has announced that the current CFO of Kraft, David Brearton, will continue as CFO of the independent global snacks company, whereas Kraft CEO Irene Rosenfeld will lead the global snacks company as its CEO.
Similarly, the current president of the North American foods division, Tony Vernon, would become the CEO of the North American grocery business; and Timothy McLevish will be the CFO of the North American grocery business upon the completion of its planned split.
The changes will become effective when the two new companies complete their split before the end of 2012.
We remain encouraged by the company’s investments in quality upgrades, promotions and marketing as well as initiatives taken to improve margin and productivity by reducing manufacturing and overhead costs and enhancing operational efficiencies by modernizing plants and information systems.
However, higher commodity costs, increased marketing expenses, competition from private labels and the presence of tough competitors like Unilever Plc. (UL - Analyst Report) and ConAgra Foods Inc. ([url=http://www.zacks.com/stock/quote/cag]CAG[/url]) add to our concerns.
Currently, we prefer to rate the stock as Neutral. Further, Kraft Foods holds the Zacks #3 Rank, which translates into a short-term Hold rating.