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Kraft IPO undercooked
June 13, 2001: 4:50 p.m. ET

In year's biggest IPO, Philip Morris unit adds a quarter in Big Board debut
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NEW YORK (CNNfn) - The year's most anticipated initial public offering, Kraft Foods Inc., inched up by less than one percent on the New York Stock Exchange Wednesday.

Shares of Kraft (KFT: up $0.25 to $31.25, Research, Estimates) gained 25 cents to closed at $31.25.

At $8.68 billion, the issue weighs in as the second-largest IPO in U.S. history behind AT&T Wireless' (AWE: up $0.23 to $16.08, Research, Estimates) $10.6 billion offering last year.

Analysts had expected only a small premium from the huge offering. "I think Kraft priced this perfectly," said Tom Frangione, a portfolio manager at mutual fund firm "Philip Morris got as much out of Kraft as they possibly could."

"I was pretty sure Kraft would go up but we were not expecting a huge pop like the tech names during the Internet bubble heyday," added analyst David Kathman, of Morningstar.

Kraft, a carve out of Dow component Philip Morris Co., came in at the top of its expected range late Tuesday, raising $8.68 billion. The company sold 280 million shares at $31 each via lead underwriters Credit Suisse First Boston and Salomon Smith Barney.

Kraft bumped up its price range Tuesday to $30-to-$31 a share from $27-to-$30. The company had planned to sell 280 million shares.

Northfield, Ill.-based Kraft whose products include Oreo cookies, Stove Top stuffing, Jell-O gelatin and Altoids candy is the largest branded food and beverage company in the United States.

With a near $54 billion market capitalization, Philip Morris (MO: down $0.76 to $47.81, Research, Estimates) is selling 16 percent to the public.

Kraft is one of the better food companies but the industry in North America is mature and companies are not experiencing much growth, Kathman said.

Parent Philip Morris acquired Nabisco Holdings Corp. in a $14.9 billion deal last year. Combined, Kraft and Nabisco had revenue of $34.7 billion in 2000. But without Nabisco, Kraft had $26.5 billion in revenue last year, down from $26.8 billion in 1999 and $27.3 billion in 1998, Kathman said.

"Kraft's revenue has been going down slightly in recent years," he said. "But it's fairly profitable."

By itself Kraft's profit margins hit 15 percent last year but combined with Nabisco dropped to 13.2 percent. However, these margins are still better than competitors Sara Lee Corp. (SLE: unchanged at $19.32, Research, Estimates) and Nestle, which each posted 11-to-12 percent margins, Kathman said.

Kraft will also feel the effects of Philip Morris's tobacco litigation going forward since Philip Morris is not relinquishing control. Following the IPO, Philip Morris owns 49.5 percent of Kraft's common stock and 97.7 percent of voting power.

Earlier this month, a Los Angeles jury ordered Philip Morris to pay more than $3 billion the largest individual award ever in a tobacco case to a 56-year-old man with cancer. The ruling followed an earlier verdict against Philip and other tobacco companies where they were also fined $17.8 million.

"Philip Morris has done a good job running Kraft but they are still so involved that tobacco litigation is going to hold Kraft back a little bit," Kathman said. graphic


Kraft IPO to begin trading this week - June 9, 2001

Kraft price range upped to $30 to $31 a share - June 12, 2001

Nabisco acquisition cleared - Dec. 7, 2001